India Inc’s credit quality remains healthy in H2FY24: Rating agencies

Thanks to favorable macroeconomic conditions, credit quality of Indian corporates remained strong between October 2023 and March 2024 (second half of FY24). This was due to deleveraging of balance sheets, sustained domestic demand and government-led capital expenditure.

Rating upgrades continued to outpace rating downgrades in the second half of FY24, according to CRISIL, ICRA and India Ratings. CRISIL said there were 409 upgrades and 228 downgrades in the second half of the year.

According to CRISIL, the credit ratio, where the rating was upgraded to downgrades, fell to 1.79 times in the second half of the financial year 2023-24 (H2 FY24), compared to 1.91 times in April-September 2023 (H1).

All three rating agencies were optimistic about corporate credit quality in the financial year starting April 2024 (FY25).

The outlook for credit quality remains positive, with upgrades continuing to exceed downgrades. This is driven by domestic demand, low corporate debt and the tailwinds of continued infrastructure expansion.

K Ravichandran, chief rating officer of ICRA, said the vast majority of rating upgrades in the second half were driven by company-specific factors in terms of factors impacting credit quality. These were expanding market share or order book, improving the cost structure and reducing project risk.

Aviation, hospitality, auto and auto parts and banking were the only sectors in FY24 where rating upgrades were mainly driven by sector tailwinds.

While commodity prices have fallen, revenues of upgraded companies in the CRISIL rating pool grew by around 13 per cent in FY24, largely driven by a rise in volume.

With balance sheets in most sectors at their healthiest, capacity utilization around peak levels and interest rate cuts expected, a broad-based recovery in private capital investment is finally in sight, says Gurpreet Chhatwal, managing director (MD), CRISIL Ratings.

Arvind Rao, senior director of India Ratings, said soft commodity prices during FY24 supported rated entities’ cash flows despite initial concerns over high debt levels and high inflation. Geopolitical issues, whether ongoing wars or weak global economic conditions, have had a limited impact on credit profiles so far.

The trend of steady improvement in lending is expected to continue in the new financial year (FY25). About 21 of the 26 business sectors tracked by CRISIL have strong to favorable credit quality outlooks. This is characterized by robust balance sheets and healthy operating cash flows – which are expected to be as high or higher than in FY24.

However, difficult times may lie ahead for some sectors. CRISIL felt that four business sectors – specialty chemicals, agrochemicals, textile-cotton spinning and diamond cutters – are facing headwinds. Their fortunes may be in line with global macroeconomic conditions, which are currently subdued.

According to ICRA, the sectors where industry headwinds played spoilsport in FY24 and may continue to do so in the near term are chemicals, cut and polished diamonds and bulk tea. The major negative factors that could throw a spanner in the works of the glowing forecasts for FY25 are the way the monsoons are shaping up this year, along with the geopolitical landscape, ICRA said.

First print: April 1, 2024 | 9:21 pm IST