The rate of upgrades improved to 16.70% from around 14% in the second half of last fiscal and up from about 3% two years ago as per the Crisil report of nearly 80% of its ratings in the first half of the fiscal. The downgrade rate on the other hand was flat at 3.02%.

Infrastructure, real estate, construction and textiles have joined sectors like financials with an improvement of credit ratios with the strengthening domestic demand, better cash flows and continued focus on debt reduction even as capital expenditure remains low.

Crisil and ICRA, the rating agencies have shown better credit ratios than last year. While Crisil said its credit ratio improved to 5.52 times in the first half of fiscal 2023 from 5.04 times last fiscal, ICRA reported a credit ratio of 3.3 times up from 2.8 times last year.

A credit ratio is the ratio of rating upgrades versus downgrades and gives a sense of the credit profile of companies. Rating agencies analyse credit ratios twice every year.

“Around 35% of all upgrades were from the infrastructure sector (including large realty players)…. driven by improved operating cash flows, completion of crucial project milestones and equity infusion. Over the last few years increasing share of central counterparties in infra projects has led to more predictable payment cycles providing additional comfort to credit quality.” said Gurpreet Chhatwal, MD, Crisil Ratings.

In all, Crisil had 569 upgrades and 103 downgrades during the period.

ICRA upgraded 18% of its portfolio entities in the first half of the fiscal significantly higher than the 10-year average of 11%. Downgrades at 5% remained on a leash below the 5-year average of 12% lower than the 10-year average of 9%.

Real estate, textiles, financials, engineering, construction, and roads sectors constituted almost half of the total upgrades by ICRA in the first half of FY2023, while constituting one-third of ICRA’s rated portfolio.

“The business rebound post the pandemic, limited capital expenditures and hence restrained fresh term borrowings, and organic reduction in the existing balance sheet debt kept the incremental downside credit risks low,” ICRA said.

ICRA recorded 250 upgrades and 76 downgrades. There were only five defaults in ICRA’s portfolio in the half-fiscal, compared with 42 in FY2022 and 44 in FY2021, with four out of the five defaults being from the non-investment grade.

“A significant hardening of interest rates, however, is a risk factor that would impact discretionary spending, make debt less affordable, and restrain capex. Further, an escalation in geopolitical conflicts, a global recession, and global fund flows (inter-related, not distinct factors) would challenge India’s macroeconomic fundamentals, even if not as much in relation to the other economies. These factors, directly or indirectly, would have a bearing on the credit quality trendlines, looking ahead,” said K Ravichandran, chief rating officer ICRA.

ICRA has a negative outlook on airlines, media and entertainment (exhibitors and print), and power (thermal and distribution) and a positive outlook on oil and gas (upstream) and roads (toll).

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