A recent report of India Ratings & Research (A Fitch group company) makes some very interesting observations about the corporate credit profile of India. The report highlights that corporate credit profile is deteriorating progressively and this trend is likely to persist in near term, implying that (a) the stress in the financial system may not ease materially in the near term and (b) the credit growth that is struggling at the multi year low levels may not see any significant improvement in the next few months at least.
The key highlights of the report could be listed as below:
·Rating downgrades by India Ratings and Research (Ind-Ra) increased sharply in 9MFY20, with the number of upgrades reducing dramatically.
·Defaults were significantly higher at 4.9% of all issuers reviewed during this period, as compared to 2.9% last year.
·Utilities and capital goods industries together contributed to the most number of defaults at 31%.
·Rating changes for 9MFY20 was 30%. A and BBB rating categories were hit by high downgrades.
·Increasing working capital intensity and deteriorating profitability resulting from the prevailing demand slow down are the leading reasons for the rating downgrades in more than half of the cases.
·Working capital challenges were more pronounced in investment-linked sectors, particularly where state governments w ere counterparts or issuers had export exposures. Issuers faced significant delays in collections.
·Interestingly, issuers which saw revenue growth also witnessed downgrades as operating profits were seen contracting 250bps. Since many of these issuers were leveraged higher than their peers, it weakened their financial metrics to an extent that they could no longer sustain the ratings.
·Demand pressures saw the consumption-linked sectors with a higher proportion of downgrades at 51%, followed by investment-linked sectors at 43% and the rest by financial sector companies. Capital goods (mainly tier II construction & engineering), utilities (renewable energy issuers) and food, beverages and tobacco (FBT) industry were the most impacted.
Capital goods faced multiple headwinds of slower order book growth, lower profitability and increasing working capital pressures. Despite the expected large infrastructure spending announcements by the government, the credit pressures are expected to persist over the medium term.
Downgrades in the utilities industry, was because of mounting receivables from state distribution companies (discoms) and uncertainty of some discoms honouring existing power purchase agreements.
·The consumption slow down witnessed during the year has intensified the demand-side challenges, given that private investment has been in a slow lane and export growth has remained tepid because of the global demand and trade dynamics.
At end-December 2019, 13% of the ratings (FY19: 6%) were on a Negative Outlook or on Rating Watch Negative, indicating that the pressure on corporate credits to persist for at least the next two to three quarters.