India Inc’s credit profile continues to worsen; 21 firms being downgraded every day on average

Even before the pandemic made things worse, the economy was slowing with GDP growth in FY20 clocking in at an anaemic 4.2%.

At around 21 downgrades a day between January and now, the finances of corporate India continue to deteriorate. Close to 3,936 firms have been downgraded during this time while 593 have been upgraded. From 464 in January to 582 in June, downgrades have been rising steadily;the first nine days of July have seen 161 downgrades. Businesses, whether in manufacturing or the non-banking financial companies (NBFCs) space, are stressed.

About 35% of credit ratings on Indian companies have either a negative outlook or are on credit watch with negative implications, S&P Global Ratings had observed in a note on June 24. “That increases to one-in-two ratings if we exclude debt-free companies in the IT sector,” analysts at the rating agency wrote, adding further downgrades were possible in spite of several negative rating actions over the past three months.

Last week, Moody’s Investors Service changed the outlook for JSW Steel to negative while S&P downgraded Delhi International Airport (DIAL) to ‘B+’ as it anticipates a slow recovery in traffic in the wake of the travel restrictions.

DIAL’s ratio of operating cash flow to debt, the agency observed, was expected to stay below its downgrade trigger of 5% over the next 12 months even if the airport operator receives its commercial property development (CPD) deposit and an upcoming tariff revision is favourable.

“The rating confirmation recognises that while JSW’s credit profile will deteriorate reflecting the challenges brought by the pandemic, we believe that the company’s financial metrics will likely recover to levels commensurate with the current ratings by the fiscal year ending March 2023 (fiscal 2023),” Moody’s wrote.

Even before the pandemic made things worse, the economy was slowing with GDP growth in FY20 clocking in at an anaemic 4.2%. For a sample of 1,691 companies (excluding banks and financials), net profits crashed 38% during the year; excluding TCS and Reliance Industries (RIL), the fall was a steeper 45%. With the lockdowns being reimposed in parts of states such as Maharashtra and Karnataka, espeically in big cities and industrial hubs, economic activity could be further hurt. This in turn, would hurt banks. India Ratings observed recently the stressed – debt ratio in India’s banking system is likely to surge to 18.21% of the total, from 11.57% currently.

On June 26, S&P lowered the ratings on four NBFCs, Shriram Transport Finance, Bajaj Finance, Manappuram Finance and Power Finance Corporation as believing that worsening operating conditions, following Covid-19, have increased risks for financial institutions operating in India and expect a recession to hurt the financial sector.

“We expect the asset quality of Indian finance companies to deteriorate, credit costs to rise, and profitability to decline over the next 12 months. Given the large acceptance of moratorium by borrowers, funding and liquidity problems could worsen for these companies,” S&P wrote.

Earlier on June 18, Moody’s Investors Service had downgraded Tata Motors’ corporate family rating (CFR) and the company’s senior unsecured instruments rating to ‘B1’ from ‘Ba3’. The outlook on all ratings were changed to negative from ratings under review. Crisil believes downgrades will continue to outnumber upgrades in 2020-21 following the economic impact of the pandemic.