India Ratings expects FY25 to be yet another year where the upgrades might exceed downgrades, however with further increase in the downgrade-to-upgrade (D/U) ratio.
With private capex spends likely to increase, leverage may start showing signs of marginal deterioration. The proportion of ratings affirmation is likely to increase marginally. At end-FY24, Ind-Ra had about 80% of the rated entities on a Stable Outlook with the rest equally divided between positive and negative outlooks.
The corporate credit profile continued its robust performance in FY24, the third year in a row, the rating agency said, during which it upgraded the ratings of 312 issuers, representing 19% of the reviewed portfolio. Rating downgrades were seen in 114 issuers. The corporate D/U ratio while remaining low at 0.37 for FY24, witnessed some moderation from 0.26 seen in FY23.
Defaults also remained low at 0.9% of the co-operative reviewed ratings in FY24 (FY23: 0.8%).
Arvind Rao, Senior Director, Head of Credit Policy Group at Ind-Ra says, “Corporate India’s performance in FY24 remained on track, with upgrades continuing to outpace downgrades significantly. The pace of upgrades moderated while at the same time downgrades increased, both of them marginally by about one percentage point. The continued improvement in credit profiles can be attributed to similar reasons seen in FY23 – deleveraged balance sheets; sound domestic consumption demand, especially in the premium segment; and the government’s continued focus on capex spending. All of this summed up in India’s growth story, as reflected in healthy GDP growth estimated at 7.3% for FY24, following an equally strong 7.2% in FY23. Soft commodity prices during FY24 supported the rated entities’ cash flows, despite the initial concerns on elevated cost of debt and high inflation. Geopolitical issues, be it ongoing wars or weak global economic conditions, have had limited impact on the credit profiles till now.”
The rating action
Among the infrastructure sectors which witnessed positive rating actions, majority of the rating actions were from renewable power and road operators, supported by either their capacities coming online or strengthened operating performance during FY24. Nearly 37% of these issuers had also seen positive rating actions in the previous year.
Corporates in capital goods and auto components saw positive rating actions due to a favourable demand with strong order flow as well as the China+1 strategy. For auto sector, this can also be evidenced with monthly passenger vehicle sales reaching new highs.
Among consumer services issuers, the hotel sector benefitted from higher occupancy and average room rates while education issuers were supported by an increase in student headcount.
Residential real estate players, especially those in the tier-1 premium segment, were supported by significantly better-than-expected presales and healthy occupancy levels.
Financial sector issuers witnessed high stability in their ratings, with more than 90% of the ratings being affirmed and no downgrades. Positive rating actions were seen with issuers benefitting from strong credit growth, driven by sustained retail and continued corporate credit growth and continued strengthening of balance sheets. Ind-Ra expects healthy banking credit growth at 15.4% yoy in FY25, from a revival in private capex benefitting the growth of the corporate segment.
Textiles was the only sector which had twice the number of rating downgrades as upgrades. The sector was impacted by the lower demand from key overseas markets as well as inability to pass on volatile raw material prices. The other consumption sector which witnessed higher negative rating actions was fast moving consumer goods (FMCG), led by a margin squeeze on account of volatility in raw material prices as well as an elongated working capital cycle leading to deterioration in the financial metrics.
Construction sector, mainly in the road EPC entities who were downgraded, saw order executions getting delayed or increasing margin pressure amid rising competition.
Nearly three-fourths of Ind-Ra’s reviewed portfolio saw rating affirmations in FY24. Sectors which largely sustained their credit profiles were financial services, information technology and services. This was also in line with Ind-Ra’s Stable rating outlook for FY24 for almost all sectors on the back of the broad-based recovery and improved balance sheet, with pockets of stress in export-oriented sectors or those constrained by elevated costs.
The propellors
The primary reasons that led to positive rating actions were an improvement in the revenue profile and operating performance. Some of the drivers for the strong revenue growth are a spurt in demand for existing products, higher execution of projects/order book amid demand recovery or higher realisations or higher contribution from the launch of new products/additional facilities. Improved product mix or improvement in orderbook or successful completion of capex plan with capacities coming online led to better-than-expected growth in the operating performance. On the other hand, liquidity mismatches and pressure on profitability were the major reasons for negative rating actions. Liquidity challenges, however, were not due to any systematic disruptions, and were largely from entity-specific issues, while the inability to pass the rise in raw material prices and high competition led to the pressure on profitability.