In a sign of a sharp economic recovery, credit profiles of companies has seen a marked improvement in the five month period of current fiscal as compared to COVID affected April-August period of 2020.
A testimony to improving conditions post the pandemic is the resilient performance of the corporate sector, particularly manufacturers ring, as it is also evident from rising number of credit upgrades by credit rating agencies (CRAs) that has grown by over 2.4 times this year so far.
As per an analysis of the overall rating migration data for the April-August period over the last 3 years done by Acuite Ratings, there is a sharp recovery in the Credit Ratio (CR) of the CRA industry from 0.56x in the previous year to 2.30x in the current year which is significantly higher than the levels seen in the pre-pandemic year i.e. FY20.
The number of upgrades during the period under review has increased by 2.4 times this year vis-a-vis April-August 2020 and the downgrades have almost reduced by 40 per cent.
As per Acuite, the number of credit upgrades by all the CRAs in April-August period of current year stood at 1,380, far higher or more than 571 in the five month period of last year and close to pre pandemic level of 1,399 reported in April-August period of FY20. Similarly, credit downgrades have fallen from 1,015 last year to 601 in five months of current fiscal.
The number of upgrades during this five month period is almost similar to that in the pre-COVID year while the number of downgrades has almost halved from those levels, the ratings agency's analysis showed.
Acuite analysis also looked at a longer time horizon since FY18 and analysed the movement of both Credit Ratio (CR) and Modified Credit Ratio (MCR). It found that while the volatility in the MCR is far less than the CR given the stability provided by addition of the reaffirmation cases, the trajectory in both the ratios first reflect the slowdown in the economy since FY19 which got severely aggravated by the COVID pandemic starting from the last quarter of FY20 and thereafter, the subsequent recovery that has been set in motion in the current year.
Most of the downgrades that happened in the first half of FY21 had taken into account an actual or expected deterioration in the liquidity position and a severe impact on the business profile of the rated entity.
In this uptrend, few sectors such as chemicals, pharma and fertilisers were not only resilient to the economic disruption caused by the COVID pandemic but their business and financial position have strengthened over the last one year.
There is also a distinct recovery in the core infrastructure sectors with the focus on higher infrastructure investments leading to higher demand scenario in steel, cement and power.
With the removal of lockdown restrictions, the road sector has also started to see a recovery both in terms of project completion and toll collection. There is also a significant revival in sectors such as auto, gems and jewellery and textiles with expectation of a pent up demand.
The improving credit ratio in the financial sector, Acuite said, reflects a significant moderation in concern on asset quality deterioration and liquidity impairment, given the monetary and the fiscal support measures; however, the credit ratio at 1.08x in April-August 21 indicates the continuing uncertainty particularly on retail asset quality.
The travel and the hospitality sector, understandably has been severely impacted during the pandemic and the persistent weak credit ratio indicates that recovery herein will take at least a few quarters; similar is the case for the real estate sector.
There appears to be an uptick in the capital goods sector although the number of downgrades is still slightly higher than that of upgrades here, the ratings agency said.