As infrastructure, automotive, and cement businesses leverage solid cash flows to buttress balance sheets, Indian enterprises that rely on domestic demand are seeing their credit ratings upgraded at rates close to a decade high. This could signal a rebound in private-sector capital investment in the near future. But merchandise exporters, such as textiles, jewellery, and specialized chemicals industries, are confronting global trade headwinds.
After evaluating the debt-servicing capacity of borrowing corporations on Tuesday, rating agencies said that the financials of rated companies had improved secularly for the third consecutive fiscal year. Even the junk-bond category is seeing upgrades, decreasing the likelihood of defaults, but at a slower rate than in the past.
Conservative corporate action on debt financing and solid local demand — visible in a continuous climb in capacity utilisation for capital-heavy industries such as steel, cement and metal — are the likely causes underlying the broad-based improvement.
However, the dangers of consumer demand contraction and higher hurdle rates for borrowers exist due to sticky inflation and consistently increasing borrowing costs.
When compared to the rest of the world's economies, India is doing relatively well right now, according to K Ravichandran, chief rating officer of ICRA (Moody's affiliate in India). "The upward movement in the ratings has been supported by a strong upgrade momentum and much fewer downgrades, including defaults. The falling share of non-investment grade ratings has also contributed to this trend."
The first half of the fiscal year saw 443 upgrades and 232 downgrades at Crisil, the largest rating agency in India. ICRA said that there were twice as many rating increases as rating decreases, and that 11% of all rating increases were for non-investment grade securities, which is 200 basis points higher than the 10-year average.
One basis point is equal to one-hundredth of one percent.
Only 55 enterprises in India were given downgrades while 146 received upgrades. In the six months ending in September, CareEdge Ratings raised 217 companies and lowered 130.
"Infrastructure has benefitted not only from high budgetary allocation, but also from better risk sharing among stakeholders and acceptance of investment vehicles such as infrastructure investment trusts," said Gurpreet Chhatwal, managing director, Crisil Ratings, a unit of S&P.
After some troubled enterprises, including Essar Steel and IL&FS, tanked, Indian corporations have turned conservative and deleveraged, leading to an uptick in financials during the previous two years. Promoter adoption of better management methods can also be attributed to the threat of losing companies under bankruptcy law.
The ratings upgrades were supported by the BBB and BB rated mid-corporates, according to Arvind Rao, head of credit policy at India Ratings. They maintained their high ratings in over 20% of the ratings under consideration.
Crisil predicts a 10% gain in operating earnings across around 20 industries, including autos, dairy, consumer products, and renewable electricity.
Profit Margins Increase with Higher-Quality Products
Profits were up thanks in part to the fact that consumers favored items with better margins.
Upgrades were seen in "auto and auto components," "realty," and "companies in consumer services," according to India Ratings. Ratings for the construction industry have improved due to things like "continued government capex spending" and "green shoots" in private capex.
High global interest rates and shifting industry dynamics pose a financial risk to exporters with debt on their balance sheets, such as companies in the textiles, diamond, and specialty chemicals industries. However, higher domestic consumption demand is currently outweighing theoretical risks posed by a steady climb in interest rates over the past year.
ICRA predicts a 22% drop in exports for the cut and polished diamond industry this fiscal year due to sluggish consumer demand. Because of sanctions against Russia, "the spread between polished diamond prices and rough diamond prices could narrow," and "part-consumption could shift in favor of lab-grown diamonds."
Because of their lower purchasing power, small and medium-sized exporters are also feeling the pressure.
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