The ratings agency believes that the worst is over for the Indian economy, and present trends indicate that upgrades will outnumber downgrades in 2010-11
Ratings agency CRISIL has said that in a reversal of a three-year trend, it has upgraded more companies than it downgraded in the second half of 2009-10 as against 108 rating upgrades, there were 95 downgrades. The number of defaults too declined during the second half of the year to 20 from 29 in the first half, it said in a release.
Roopa Kudva, managing director and chief executive officer, CRISIL, said, “We believe that the worst is over for the Indian economy, and present trends indicate that upgrades will outnumber downgrades in 2010-11. However, the degree to which the credit cycle turns will depend on the sustainability of demand growth, and the impact of fresh capital expenditure on players’ balance sheets.”
This reversal resulted in CRISIL’s modified credit ratio (MCR; the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations) increasing 0.93 times for the entire 2009-10 period from 0.86 times for 2009-09, snapping a four-year trend of decline that had begun in 2005-06, it said.
With this, the credit cycle seems to have turned after the recent global economic slowdown. These trends were observed on a portfolio of almost 4,000 CRISIL-rated entities; of these, 75% are mid-sized entities, each having an annual turnover of less than Rs5 billion, the ratings agency added.
CRISIL, a Standard & Poor's unit, said that companies in the real estate and real-estate-dependent industries account for 18% of the ‘negative’ outlooks, while those in the textile business account for 12%. Both these industries are still highly leveraged, and will require strong demand revival or large equity infusions for their credit profiles to stabilise. Textile players will also need to contend with exchange rate volatility, it added.
Construction players, on the other hand, are witnessing robust demand, arising from the government’s increased focus on infrastructure spending, account for almost 20% of the ‘positive’ outlooks, CRISIL said.
The ratings agency said that it believes that the outlook for credit quality in 2010-11 is positive. While present trends indicate that upgrades are likely to outnumber downgrades in 2010-11, a global credit event on sovereign debt, a build-up of inflationary expectations, and exchange rate volatility may yet disrupt the trends over the near to medium term.
“The credit fallout of these events can be significant because governments have limited room to address them through further fiscal and monetary measures,” cautioned Ajay Dwivedi, director, CRISIL Ratings.
CRISIL said that infrastructure and infrastructure-related industries (including power equipment, steel, cement, healthcare, and education) and the financial services sector are likely to witness high demand growth over the medium term. Export-dependent industries, such as gems and jewellery, textiles, and information technology (IT) and IT-related services, are likely to grow moderately on the back of revival in the global economy. Commercial real estate and leisure industries are likely to face severe demand-supply imbalances.