Credit ratio improves but high debt companies continue to struggle: Crisil

By Joel Rebello

MUMBAI: Credit ratio of Indian firms improved in the first half of the current fiscal year led by companies from the consumption and export linked sectors, a report by rating agency Crisil Ltd said on Monday.

However, companies which were already burdened by debt have seen their credit ratio worsen in the last six months as investments have not picked up and deleveraging through assets sales is slow, the agency said.

Overall credit ratio or number of firms upgraded versus those downgraded improved to 2.13 times in the first half against 1.68 times at the end of the last fiscal year. In all, there were 981 upgrades to 460 downgrades, during this period.

However, credit pressures intensified for highly leveraged firms particulalry in the metals, real estate and infrastrcuture sectors as these companies continued to grapple with high debt, low product prices and could not make much headway in asset sales.

Crisil defines highly levearged firms as those with a debt to earnings before interest tax depreciation and amortisation (EBITDA) ratio of 2.5 times or higher.

The debt-weighted credit ratio (total debt on the balance sheets of firms upgraded versus downgraded), declined to the lowest level in nearly three years to 0.27 time in the first half, against 0.62 time for the entire fiscal 2015. Pawan Agrawal, chief analytical officer, at Crisil said 90% of the firms downgraded in the first half of the current fiscal year belonged to the investment-linked or commodity linked sectors.

"Investment pick up in infrastrcuture is delayed and deleveraging by selling assets is also taking longer than earlier expected because the viability of projects has changed on account of the change in demand outlook and some sales have not happened because of mismatch in valuations," Agrawal said. In contrast, credit quality improved for firms dependent on consumption or export demand, as well as for those with low leverage.

"Around 80% of the upgrades were of firms with low leverage (debt to EBITDA below 2.5 times) or from the consumption and export-oriented sectors such as packaged food, pharmaceuticals, agricultural products and readymade garments," Crisil said.

The total debt of companies from the infrastructure, metals and reats estate sectors,was at Rs.2.4 lakh crore. “Leverage emerged as a key differentiator of credit quality in the first half. Another critical factor was the extent of linkage firms had to investment cycle, consumption demand and commodity price movement,” said Somashekar Vemuri, senior director, Crisil.