India Inc's credit quality improved sharply in second half of FY22

Corporate India's credit quality showed a sharp improvement in the second half of FY22, but high input prices and withdrawal of pandemic-related relief measures can pose pressures in the new year, rating agencies said on Friday.

Crisil Ratings, which rates a large number of financial sector entities, reported an improvement in the credit ratio -- the number of upgrades to downgrade -- to 5.04 times in the second half of this financial year, from the 2.96 per cent in the first half of the fiscal.

It attributed the improvement to a sustained rebound in demand, which lifted revenues of most sectors to pre-pandemic levels

and proactive relief measures by the government that cushioned the pandemic blow.

The agency gave a "positive" outlook on credit quality going ahead and expects the upgrades to outnumber downgrades in FY23 as well.

However, with the pressure exerted on input prices, courtesy a push in commodity prices following the Russian invasion of Ukraine, and the possibility of withdrawal of pandemic-related relief measures can also moderate the credit ratio, it said.

"Demand recovery, nimbleness in managing supply chains, and a tight leash on costs have shored up the median operating profit growth of the upgraded companies by 41 per cent in the past two fiscals — more than double the rate for the portfolio," its president and chief ratings officer Subodh Rai said.

Meanwhile, Icra said credit quality rebounded in FY22 after the economic slowdown in FY20 and the pandemic scarred FY21.

The downgrade of 184 entities lowered the downgrade rate to a mere 6 per cent, as against a ten-year average of 9 per cent, while the upgrade rate was 19 per cent in FY22 on the back of 561 entities' ratings upgrade, it said.

The tourism, hotels and restaurants sector had the lowest credit ratio of 0.4, while the ferrous metals sector at 16 was the best, Icra said.

India Ratings termed FY22 as a surprising "remarkable recovery" year with its downgrades to upgrades ratio being at a decadal low of 0.3, which marks a reversal of three year trend where downgrades exceeded upgrades.

The agency said it upgraded ratings of 276 companies in FY22, which represents 23 per cent of its rated portfolio, while only 86 companies' ratings had to be downgraded.

It expects the pace of rating upgrades to moderate in FY23.

Corporate India is also likely to experience a contraction in margins as the Russian war goes on, but the outlook has been placed at "stable" by the agency across sectors because of companies' ability to weather stress.