MUMBAI, India — Credit Rating Agency Crisil Ratings has revised the credit quality outlook of India Inc for fiscal 2022 to positive from cautiously optimistic earlier, predicated on a sustained recovery in demand after the blip caused by the second wave of Covid-19 afflictions in the first quarter.
The report said that the increase in coverage of vaccinations should also mitigate the impact of a third wave if it comes about.
“The sharp rise in Covid-19 cases since mid-February 2021 and the impact of any stringent containment measures on businesses are the key threats to the nascent demand recovery and could impact the credit quality outlook adversely,” said Somasekhar Vemuri, Senior Director, CRISIL Ratings in the press release.
“That said, the CRISIL Ratings’ resilience study of 42 sectors indicates that only 6 (accounting for 4 percent of the rated debt) are highly sensitive to a Covid-19 resurgence, while 20 are moderately sensitive.”
The credit ratio (upgrades to downgrades) in the first four months of this fiscal improved to more than 2.5 times. It had touched a decade low of 0.54 time amid the first wave in the first half of fiscal 2021 before recovering to 1.33 times in the second half, buoyed by a rebound in demand.
A Crisil rating study of 43 sectors (accounting for 75 percent of the INR 36 lakh crore ($484.9 billion) outstanding rated debt excluding the financial sector) shows the current recovery is broad-based.
As many as 28 sectors (85 percent of outstanding corporate debt understudy) are on course to see a 100 percent rebound in demand to pre-pandemic levels by the end of this fiscal. In contrast, six will see upwards of 85 percent.
“Our outlook revision factors in strong economic growth, both domestic and global, and containment measures that are localized and less stringent compared with the first wave which should keep domestic demand buoyant even if a third wave materializes,” said Subodh Rai, Chief Ratings Officer at Crisil Ratings.
“We believe India Inc is on higher and stronger footing.”
Among sectors with the most rating upgrades, construction and engineering, and renewable energy benefited from the government’s thrust on infrastructure spending while steel and other metals gained from higher price realizations and profitability.
The growth-oriented Union Budget for next fiscal, which provides for higher infrastructure spending and targeted incentives for domestic manufacturing – besides a normal monsoon and the low base of fiscal 2021— shall drive GDP growth of 11 percent next fiscal and, in turn, improve the credit profiles of India Inc.
Pharmaceuticals and specialty chemicals continued to see buoyancy backed by both domestic and export growth.
But contact-intensive sectors such as hospitality and education services continue to bear the brunt of pandemic and have had more downgrades than upgrades.
To be sure, targeted relief measures by the Reserve Bank of India (RBI) and the government amid the second wave have cushioned credit profiles in some sectors.
The financial sector is also better placed today than a year back, given less stringent lockdowns and the systems and processes to manage collections amid the restrictions.
Support from the government and the Reserve Bank of India through emergency credit lines, moratorium, and one-time debt restructuring for pandemic-affected companies have helped banks and non-banks curb a rise in non-performing assets.
Credit profiles in the financial sector have been supported by higher capitalization levels, better provisioning cover, and increased access to liquidity.
Unsecured retail and micro, small and medium enterprise loan segments are likely to witness higher stress over the near term, said Crisil. The key monitorable from here will be a fat tail in the second wave or a third wave.
Other risks to the positive credit outlook include regional and temporal rainfall distribution and implications for sustained demand recovery. Small businesses, in particular, will be more vulnerable to any slack in demand.
(With inputs from ANI)
Edited by Saptak Datta and Praveen Pramod Tewari
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