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Credit quality peaks

business Updated: Apr 06, 2011 22:59 IST
HT Corresondent
HT Corresondent
Hindustan Times
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Indian companies’ credit quality is at its peak, but profitability of players in the cement, chemicals, construction, automobile and textile spinning industries may be affected by high input prices in the current financial year, according to rating agency Crisil.

Crisil upgraded the ratings of 605 companies and downgraded 269 in 2010-11, on a base of around 6,200 companies, leading to improvement in its modified credit ratio (MCR- an indicator of the relative frequency of upgrades and downgrades) to 1.10 times in 2010-11 from 0.93 times in 2009-10.

“Upgrades outnumbered downgrades in 2010-11, driven largely by healthy demand conditions and a favourable funding environment” said Roopa Kudva, managing director and chief executive officer, Crisil.

The agency believes that going forward, the MCR, which has maintained upward trajectory for the second year, after plummeting to a decadal low of 0.86 times in 2008-09, may not improve further.

“Any further improvement in MCR may be limited on account of increased pressure on profitability, given the rising trend in commodity prices and interest rates, and intensifying competition,” said Pawan Agrawal, director, Crisil Ratings. “MCR may reverse going forward,” he said.

He clarified that number of upgrades will continue to outnumber downgrades over the near term.

“We believe that sustainability of demand will be a key determinant of the credit profiles of companies in the medium term,” said Agrawal. “While demand has been buoyant so far, increasing interest rates and commodity prices have potential to slow down investment-driven demand,” he said.

According to him oil price shocks due to unrest in the Middle East and North Africa, and interruption in trade and investments due to unexpected developments in stimuli-supported developed economies are the major external factors that can have significant impact on corporate credit quality.

Elaborating on the rating in the previous financial year Agrawal said while the upgrades have been broad-based, across rating categories and industries, the downgrades have been largely concentrated in the low rating categories.

“While the upgrades were spread across rating categories, about 70% of the downgrades was from the low rating categories-of ‘BB’ and lower, which have historically been more vulnerable to downgrades,” said Agrawal.