Crisil downgrades exceed upgrades after eight quarters

In the backdrop of weakening liquidity and volatile rupee emerging as key risks, rating agency Crisil today said it had downgraded ratings on 148 entities in the third quarter (Q3) of 2011-12, while upgrading ratings on 138 entities.

With downgrades outnumbering upgrades, CRISIL's rating action ratio (RAR, an indicator of the relative frequency of upgrades to downgrades) declined to 0.99 times for Q3 2011-12 from 1.11 times for the corresponding quarter of the previous year.

Earlier in September 2010, based on an analysis of the aggregate financial performance of select companies across 21 industries (excluding banks and oil companies), Crisil had said that it expects most companies to post a lower year-on-year (YOY) revenue growth of around 15 per cent, down from 19 per cent in the preceding quarter and 22 per cent in July-September 2010 (See: Corporate revenue growth may decline to around 15% in Q2: Crisil).

A third of the downgrades was caused by pressure on demand or profitability,  while another third of the downgrades was the result of weakening liquidity, either on account of stretched working capital requirements or large capacity expansions; liquidity has emerged as a key monitorable for Crisil in its ratings of entities.

Says Ramraj Pai, director, Crisil Ratings, ''Our downgrades have outnumbered upgrades for the first time in eight quarters. A sizeable proportion of downgrades has been in the textile and construction industries - decline in cotton prices and sluggish domestic and global demand drove downgrades in the textile sector, while those in the construction sector were the result of stretched receivables and slowdown in demand.''

Rating upgrades, however, were driven not so much by industry-wide factors, as entity-specific ones - including equity infusions by promoters resulting in correction in capital structure, and stabilisation of new capacities, which were earlier in project-implementation phase.

Adds Pai, ''We expect pressure on the credit quality of Indian companies to continue, with downgrades continuing to exceed upgrades in the next few quarters. Corporate India continues to face challenges both in the domestic market, where there has been a slowdown in the economy and in infrastructure activity, and on the export front, with uncertainty looming large in Europe. High interest rates and sharp movement in currency value have added to the list of woes that India's
corporates face.''

Crisil's estimates indicate that foreign currency debt of about $17 billion will come due for repayment in the next 18 to 24 months. Refinancing the debt may be difficult because global investors have become increasingly risk-averse, given their uncertain economies back home.