Executive summary

The Crisil Ratings credit ratio¹ (upgrades vs downgrades) continues to be high — at 5.52 times in the first half of this fiscal (H1-FY23) — underscoring ongoing broad-based improvement in India Inc’s credit quality. The credit ratio was 5.04 times in the second half of last fiscal (H2-FY22).

The credit ratio is in line with the positive credit quality outlook Crisil Ratings had articulated earlier — that upgrades will far outnumber downgrades through this fiscal.

To be sure, ratings on nearly 80% of the Crisil Ratings portfolio was reaffirmed, or there was no change during H1-FY23. That compares well with the historical average of 83%.

For the rest of the portfolio, what has changed is the upgrade rate, which increased to 16.70%, while the downgrade rate was flattish at 3.02%. In all, there were 569 upgrades and 103 downgrades.

Three reasons stand out: 1) strengthening domestic demand, with the economy expected to grow 7.3% this fiscal; 2) higher realisations leading to better cash flows; and 3) continuation of debt-light balance sheets as capex remains low. The performance of upgraded companies improved significantly over the past three fiscals despite severe pandemic-related disruptions. This is reflected in the median expected growth in Ebitda² at a 3-year CAGR³ of 25% for the upgraded companies which is much better than the 12% expected for the rest of the portfolio.

Around 35% of all upgrades were from the infrastructure sector (including large realty players). Infrastructure sector is in a unique position of largely being a domestic story and generally decoupled from the global headwinds. Here, upgrades were driven by improved operating cash flows, completion of crucial project milestones and equity infusion. Over the last few years increasing share of central counterparties in infra projects has led to more predictable payment cycles providing additional comfort to credit quality.

The deleveraging trend has continued with median gearing of the Crisil Ratings portfolio expected to touch a decadal low of less than 0.5 time this fiscal. While capacity utilisation is on an improving trajectory backed by healthy offtake, private capex is not expected to pick up substantially in the near term. This has arrested the downgrade rate, despite some sectors facing challenges such as higher input costs and rising interest rates.

Strong balance sheets are expected to hold India Inc in good stead even though global uncertainties persist.

Crisil Ratings’ proprietary ‘Corporate Credit Health Framework’ analysed the operating cash-flow strength (measured by expected change in absolute Ebitda) and balance sheet strength of the top 43 sectors that account for over 70% of rated debt (excluding the financial sector) in fiscal 2023 over fiscal 2022.

The framework was conceptualised to give shape to our credit quality outlook on various sectors. Notably, sectors which were classified under ‘the most buoyant bucket’ in the first edition of this study in April 2022, including pharmaceuticals, specialty chemicals, hospitals, and education services, saw the highest credit ratio in H1-FY23.

¹ Excludes rating actions involving ratings with the Issuer Not Cooperating (INC) suffix
² Earnings before interest, taxes, depreciation and amortisation3
³-year CAGR – compound annual growth rate for three years from fiscal 2020 to fiscal 2023