Debt  quality  of  companies improves  in  Jun e quarter

According to analysts, even though regulatory measures helped cushion the covid impact, larger firms were more resilient than smaller peers.

Icra upgraded ratings of 142 entities and downgraded 82 entities in April-June. “On the reasoning for upgrades in Q1 FY22, a longer track record of operations is seen to be the trigger in a large number of cases (particularly in power and roads sectors). The second has been a rising scale of operations and order book (chemicals, pharma, construction). The third has been favourable corporate actions (ownership change, etc.). In Q1 FY22, while there was no material distinction between the downgrade rating actions in the investment grade and non-investment grade categories, the investment-grade entities clearly experienced a much greater improvement in their credit profiles, resulting in a dominant share in the upgrades,” said Jitin Makkar, head of credit policy at Icra.

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Makkar said upgrades have been exceeding downgrades since last November but have mostly been due to firm-specific factors instead of being driven by a broader economic recovery or sector-related tailwinds.

Care Ratings upgraded 106 companies and downgraded 79 in the June quarter. Sectors that saw the most upgrades were pharma, chemicals, construction, ceramics and roads, while hospitality, NBFCs and gems and jewellery saw most downgrades.

“However, small and medium enterprises are in a more vulnerable position as they are unable to pass on the shock in their operating environments and we observed many SMEs turning non-cooperative during this quarter and even during FY21, reflecting this stress,” said Sachin Gupta, chief rating officer, Care Ratings. Loan guarantee scheme for covid-hit sectors, emergency credit lines and the Aatmanirbhar Bharat Scheme helped companies, he added.

During the June quarter, India Ratings upgraded ratings of 86 issuers and downgraded 26. This is in stark contrast to last year when it downgraded 59 and upgraded 26.

Issuers in consumer discretionary sectors like hospitality and realty continued to face operational constraints during the second wave. For others, the rating actions were driven more by individual issuer-related pressures on operations and financial metrics and not due to any sector-related concerns, said Suparna Banerji, associate director at India Ratings’ Credit Policy Group.

“Sectors that saw a stronger-than-expected business recovery in 1Q’22, supported by improving demand outlook, faced higher upgrades,” said Banerji.

However, Banerji pointed out that issuers belonging to the mid & smaller segment continue to be more impacted in the second wave. Of the total downgrades by Ind-Ra in the first quarter of FY22, 58% belonged to this sector. Of these, 80% belonged to the vulnerable sub-investment grade ratings. These issuers faced higher challenges to weather through the covid-19 disruption on their business operations. “This was further aggravated with the loss of market share to larger companies in the respective sectors due to inability of the smaller companies to scale up their businesses amid liquidity challenges. Working capital challenges leading to impact on financial metrics and liquidity were the key factors for their ratings downgrades,” Banerji added.

According to Banerji, the corporate credit profile turned resilient in the second wave thanks to the learnings from the first wave. Unlike the first wave, rural areas were significantly affected with high infections and fatality rates this time, leading to concerns on likely loss of consumption demand in rural areas. Material slowdown in consumption from the expected rise in inflation, cautious spending among households, especially on non-essentials, given unexpected higher healthcare expenses and fear of a possible third wave will remain an important factor during the remaining period of the year, she said.

Smaller companies faced downgrades across rating agencies. “Small businesses will be more vulnerable to a fat-tail second wave or a third wave of covid-19 pandemic. Large players, however, have been more resilient amidst the pandemic as they, in general, were able to adjust their operating models, move to leaner costs, and conserve/build liquidity faster than their smaller peers,” said Subodh Rai, president and chief ratings officer, Crisil Ratings.

Sectors which saw high Crisil upgrades were renewable energy, construction & engineering, steel and packaging. Construction & engineering and renewable energy benefitted from the government’s impetus on infrastructure spending, while steel and other metals from higher price realizations and profitability. Export-oriented sectors like pharmaceuticals and chemicals also continued to see upgrades outpacing downgrades while contact-intensive sectors such as hospitality and travel, real estate and education continue to see few upgrades and relatively more downgrades, said Rai.

Experts see upgrades continuing to outpace downgrades backed by an expectation of sustained demand recovery through fiscal 2022. The third wave of pandemic will be less disruptive for business and credit profiles compared to the first one, with more balanced containment measures and increase in vaccination coverage.