India Inc's credit quality improves but remains fragile

Credit quality of India Inc has improved gradually in financial year 2016-17 but remains fragile as some sectors continue to struggle and several large companies remain highly indebted, a report said. 

For FY17, credit ratio of India Inc stood at 1.22 times as against 1.29 times in previous to last fiscal. Debt-weighted credit ratio witnessed a 5-year high of 0.88 times compared to 0.31 time.  

Crisil, in its report, said, "The improvement was driven by firm commodity prices, stable macros, improving capital structure and lower interest costs. Going forward, we expect the gradual improvement in credit quality to sustain."

Corporate India saw 1,335 upgrades and 1,092 downgrades in FY17. While upgrades were driven by consumption-linked sectors, downgrades were led by investment-linked sectors.

Consumption-led sectors performed well despite demonetisation because of favorable and well-spread monsoon, implementation of 7th Pay Commission and the One Rank One Pension (OROP) recommendations, Crisil added.

Auto sector and automotive retail recorded two upgrades for every downgrade because of healthy demand, new product launches and diversification – both by customer and geography, it said.  

Pharmaceuticals sector continued to witness more upgrades than downgrades driven by robust demand both in domestic and export markets. They have also manage to increase their presence in US market and continued to diversify new molecules. 

Crisil said that demonetisation did dampen the end of 2016, especially for rural consumption.

Meanwhile, construction and industrial machinery sectors continued to witness more downgrades due to sluggish demand in end-use industries, which continued to delay capex spends resulting in lower-than-expected revenue growth and decline in profitability. 

Real estate sector witnessed maximum defaults. 

Credit quality remained under pressure with the sector witnessing more than 2 downgrades for every upgrade. Such was because of weak demand, especially in the residential segment, project delays, and slippages in existing collections, Crisil said.  

On the outlook of consumption sector, Crisil said, "We expect upgrades to outnumber downgrades in the near term driven by improving domestic consumption demand after demonetisation." 

Crisil said, "Several debt-intensive sectors such as metals (especially non-ferrous) and sugar are expected to see improvement in credit quality in fiscal 2018 because of rising prices. These trends would also reduce slippages to non-performing assets (NPAs) in the banking sector in fiscal 2018."