Ratings agency S&P Global Ratings on Wednesday said companies in India face further potential rating downside if the recovery in corporate earnings is prolonged beyond 18 months.

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About 35 percent of credit ratings on Indian corporates have either a negative outlook or are on "CreditWatch" with negative implications, S&P Global ratings said in a statement.

"That increases to one-in-two ratings if we exclude debt-free companies in the IT sector," it added.

Commenting on scenario, S&P Global Ratings credit analyst Neel Gopalakrishnan said, "for most of our ratings, we assume corporate earnings will recover over the next 12-18 months. There is downside risk to ratings if the downturn becomes more prolonged than we had expected."

All but two out of seven companies with negative outlooks or on CreditWatch negative have speculative-grade ratings. Since these companies are more sensitive to earnings volatility, the downside risk increases even further, Gopalakrishnan added.

The ratings agency said corporates in India, especially the speculative-grade ones, were not well positioned for a downturn because of their debt-funded capital expenditure and acquisitions over the past two to three years.

"This had already led to lower ratings. The number of single 'B' ratings, for example, increased to about 33 per cent of total ratings at the end of 2019, from 13 per cent in 2016. However, most India companies had limited rating headroom for a downturn, especially one as sudden and sharp as the COVID-19 pandemic," it said.

Given the weakened operating environment, S&P Global Ratings said it expects EBITDA for companies in sectors sensitive to the economy, such as automobiles and commodities, to drop as much as 25-30 per cent year-on-year this fiscal.

"We therefore, expect credit metrics to weaken in fiscal 2021 before recovering in fiscal 2022 with an earnings rebound. The credit metrics at the end of fiscal 2022 are still likely to be weaker than we had previously expected, resulting in lower ratings than prior to the pandemic," it said.

S&P had taken negative rating actions on eight of the 19 rated India corporates in the past three months.

The ratings agency said businesses in sectors such as telecom, technology, and pharmaceuticals have been more resilient, in line with global trends.

The two positive outlooks that S&P Global Ratings currently has are on companies in the IT and pharmaceutical sectors, it said, however adding "the sectors are not without risk from a rating perspective".

"How quickly India companies recover after the lockdown would be crucial to the rating outlooks or CreditWatch resolution," S&P Global Ratings said.