InvestorQ : Is it true that the corporate credit quality of Indian companies has improved in the last few months?
Chandralekha Desai made post

Is it true that the corporate credit quality of Indian companies has improved in the last few months?

NISHA Nayak answered.
1 month ago

An important measure of quality of debt of Indian corporates is measured by the CRISIL corporate credit ratio. It is the ratio of corporate upgrades to corporate downgrades and expressed as a multiple. Obviously, the higher the multiple it is more favourable. But more than the figure you must look at the time period trend of the same. According to a recent note by CRISIL, for H1-FY23, corporate credit ratio (upgrades vs downgrades) was at 5.52X compared to 5.04X in H2-FY22. In short, the credit quality has shown a sharp improvement if looked at on a sequential basis.

Let me now turn to the key factors that triggered this improvement in the corporate credit ratio as per CRISIL. The first relates to strong and growing domestic demand. India’s GDP is estimated to grow at minimum 7% for FY23 and around 6.5% for FY24. That is a lot of absolute demand generated and wealth created and should help demand stay robust. Apart from this revenge buying, price realizations are also expected to improve as higher income levels means people are willing to pay higher prices. That would be instrumental in compensating for higher input costs; partially if not entirely.

But the real story has been of deleveraging that has made the real positive impact on Indian corporates. We hear about the high profile deleveraging cases like Reliance, DLF and Tata Steel but the deleveraging has been a big trend across Indian corporates where many of the Indian companies have even chosen to err on the side of caution. According to CRISIL, this resulted in flattish downgrade rate of 3.02% and an impressive upgrade rate of 16.7%. The total upgrades stood at 569 while downgrades were 103, giving the corporate credit ratio of 5.52X for the first half of FY23 ending September 2022.

But the sectoral break-up of the upgrades is a lot more enticing. You may be surprised to know that nearly 35% of all upgrades belonged to the once-troubled infrastructure sector. Infrastructure sector has a strong domestic positioning and that virtually de-risks them from the global slowdown worries. These infra plays have also seen improvement in operating cash flows credit enhancements and equity infusion.