How India Inc cleaned up its act and got rerated during the pandemic

India's economy and businesses have seen through tough times over the last three decades and have churned out spectacular results when pushed to the wall. Be it the forex crisis of the early 1990s leading to liberalisation or the global dotcom bust that sank many a web 1.0 technology businesses, only to spawn a whole generation of battle-hardened techpreneurs, or the financial crisis 14 years ago that had a short-lived impact.

The Covid-19 pandemic that hit the globe two years ago too was nothing short of a similar, once-a-decade avalanche to batter the businesses. No doubt, the human cost of the pandemic has been significant. But the structural changes to how business is done and how products and services are consumed have shaken several businesses and disrupted many more. Still, data shows Indian companies have seized the opportunity to do a deep house cleaning.

They did not just find new ways to manage operating costs, repaid loans or refinanced them and found new markets and consumer segments to target in the new world.

So, it’s not surprising that separate corporate financial rating agencies have noted how the credit ratio—or the ratio of the number of upgrades to downgrades—has not just reversed a deteriorating trend of the last two-three years, and that includes the years leading up to the pandemic, but may have hit a decadal high.

S&P affiliate CRISIL, Moody’s affiliate ICRA, Fitch affiliate Ind-Ra and CARE have all seen a marked change in the books of corporate India. To be fair, companies do sink despite positive outlook by rating agencies and there would still be several bad apples that may have managed to mask their frailties but the broad trend is unambiguous.

Overall, the credit ratio of upgrades to downgrades has been over 3 for almost all rating agencies in the year ended March 31, 2022. In simple terms, this means for every company that saw a rating downgrade last financial year there were three firms that saw an upgrade.

Indeed, if the data of the second half of FY22 is gauged for CRISIL and CARE, it has seen even sharper improvement. For CRISIL, the ratio of upgrade to downgrade shot up to 5 against 3 in the first six months of FY22. For CARE, this rose from 2 to 2.6.

To put in the right perspective, if we consider CRISIL’s charts, the credit ratio has hovered in the 1-2 range over the last decade and rarely went beyond 2, let alone cross 5 as it did in H2 FY22.

CARE, which has been more conservative compared to its peers, also saw its credit ratio hit a decadal peak after beating the previous best seven years ago.

CRISIL, the largest rating agency in the country, summed it up in these words: “India Inc has emerged stronger and adapted fast to not just ‘living with the virus’ but thriving ‘in the new normal’, spurred by the sharp return of demand, dexterity in managing supply chains and tight leash on costs.”

Sector Vector

While the rating picture of the financial services sector remained stable, there were several other winners. In particular: power, construction, roads, iron and steel, chemicals, gems and jewellery, real estate, textiles and auto components came up strongly.

Suparna Banerji, Associate Director Ind-Ra says: “Positive rating actions were seen across almost all sectors in FY22, indicating a broader economic recovery. This is in contrast to FY21 where upgrades were limited to a few sectors.”

A large majority of upgrades were driven by entity-specific factors rather than sectoral tailwinds, ICRA noted.

In the power sector, several upgrades were triggered by the alleviation of execution risks as the renewable energy projects concerned became operational, or because of the demonstration of a consistent PLF (Plant Load Factor) track record, which reduced the uncertainty around operations.

Similarly, several upgrades in the real estate sector were triggered by fresh fund infusion by the sponsors and/or a favourable change in the ownership (including the purchase of equity stake by strong institutional investors or the entity coming under the umbrella of a REIT.

Picture for new year

So, what does this mean for the new year ending March 31, 2023?

The biggest area of concern as flagged by most rating agencies is the geopolitical risk that has been mild at best over the recent past. In particular, the uncertainties associated with the Russia-Ukraine war have tempered the positive sentiments.

CRISIL has said that the positive outlook is likely to continue but with some caveats such as moderation in export demand and commodity prices that have risen due to the conflict in Europe to impact profitability.

Ind-Ra expects the pace of rating upgrades to moderate in FY23 and corporate India could see a contraction in margins.

“As Russia’s invasion of Ukraine lingers on, Ind-Ra has revised its FY23 GDP growth forecast downward to 7-7.2% from 7.6%. However, with corporate India now better placed to ride through, what appears to be a challenging year ahead, Ind-Ra carries a stable outlook on all the sectors,” it added.

ICRA has maintained a ‘Positive’ outlook on metals, oil and gas (upstream), roads (toll) and textiles (cotton spinning). It kept a ‘Negative’ outlook on airlines, airport infrastructure, media (exhibitors), power (thermal) and power (distribution).

The rating agency says that both the real sector and the financial sector are in relatively good health. It also says FY2023 could well have been a year of moving beyond the ‘rebound’ growth, but for the geopolitical tensions.

CARE, too, has flagged the risk of commodity prices playing a spoilsport, adding that the credit ratio is expected to moderate in FY23 from the highs witnessed currently, as the portfolio has seen high upgrades in the year gone by and is now expected to remain stable.