Carrying on with the momentum since early FY22, the credit quality of corporates has strengthened further in the first half of the current fiscal with rating upgrades being more than three times that of downgrades, says Icra Ratings.

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Upgrades saw an 18 percent increase in the agency's portfolio entities in H1 on an annualised basis, which in FY22 was a notch higher at 19 percent, making it a significant mark-up over the past five-year and 10-year average of 11 percent, the agency said.

The agency upgraded 94 companies in the first half of FY21, which went up to 303 in H1 FY22, but declined to 250 in H1 FY23. For the full fiscal of FY21 there were 282 upgrades which doubled to 561 in FY22.

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As against this, the numbers of downgrades were 200 in H1 FY21, 108 in H1 FY22 and 76 in H1 FY23 and at 316 in FY21 and 184 in FY22. The credit ratios stood at 0.5, 2.8, 3.3, 0.9 and 3 respectively.

The agency, however, said the upgrades in the reporting period were concentrated in a few sectors. The real estate, textiles, financials, engineering, construction and roads sectors constituted the upgrade leader-board, accounting for almost half of the total upgrades.

The rating downgrade rate at 5 percent remained on a leash in H1, which in H1 FY22 was 6 percent in comparison with the past five-year average of 12 percent and the 10-year average of 9 percent.

The reasons for downgrades are entity-specific, which include delays faced in realising receivables, instances of inter-group transactions posing governance concerns, rising input costs with limited pricing power, besides the rise in project implementation risks for some.

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While the instances of downgrades were low, defaults were even lower with only five defaults in the agency's portfolio, compared to 42 in FY22 and 44 in FY21, and of these five, four defaults were from non-investment grade.

The ratio of investment and non-investment grade companies has also been going up as the economy has been improving.

While in FY15 only 24 percent of companies that the agency rated were investment and as much as 76 percent were below investment grade, the number rose to 27 percent in FY16, further to 29 percent in FY17 and 35 percent in FY18, 43 percent in FY19, 56 percent in FY20, 64 percent in FY21, 72 percent in FY22 and further to 78 percent so far in FY23, with the non-investment grade companies steadily falling to 22 percent in FY21 from 28 percent in the previous year and 76 percent in FY15.

Commenting on the overall developments, K Ravichandran, chief rating officer at the agency, said, a significant hardening of interest rates is a risk that may impact discretionary spending, make debt less affordable, and restrain capex.

Also, any escalation in geopolitical conflicts, global recession, and fund inflows may challenge the macroeconomic fundamentals and would, directly or indirectly, have a bearing on the credit quality trend lines going ahead.