With the first half of the fiscal concluding on September 30, what have the corporate earnings looked like? ICRA has released its report discussing some of its key findings - the hits and misses with regards to corporate earnings.

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Jitin Makkar, Head-Credit Policy said unlike the past couple of years that is FY20 and FY21, where the downward momentum was quite high, from November 2020 things have turned the other way.

"So, from November 2020 onwards, and until the month just that just ended, we upgraded a large number of entities and the numbers suggest that the pace of upgrades was almost at a decadal high. The headline numbers suggest that it has been a recovery of sorts that has been pushing up upgrades," he said.

However, there is more than meets the eye.

Even as the pace of upgrades has been at a decadal high, this does not necessarily suggest that the performance and the business fundamentals of many of these entities have reached the pre COVID level, or the level that we have seen in FY19, said Makkar, adding that most of the upgrades that have happened since November 2020, and particularly in the past six months, have been triggered by firm-specific factors.

“Many of the entities successfully deleveraged, sold off some of their assets. So, this asset monetization helped them deleverage. Plus, many of these entities were able to improve their market share. They were able to get equity infusion. The headline numbers suggest that things have turned amazingly better. But underneath these headline statistics, a more nuanced view that we have, which is that these upgrades are not really a reflection of the P&L restoring to its pre-COVID levels. The balance sheet certainly has added a lot,” said Makkar.

Talking about recovery in the consumer-facing sector, Makkar said, it depends on the reference point.

"If one were speaking of the past year and compare that with last year’s weak performance against what lies ahead then certainly one can say that recoveries are a near certainty," he said.

When asked why this pessimism when the balance sheets are improving and there is demand visibility, Makkar said, “It depends on you comparing the prognosis against what reference point. We have seen the trough and that is behind us. But the capacity utilizations are still subpar. At the moment by and large, at the overall macro level, even in the case of the hospitality sector, the occupancies are not really what they could have been. Of course, recovery is going to be prolonged for these sectors, and for aviation and hospitality, it's going to be a long road,” he said.

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Talking about the sectors they are bullish on and not so upbeat on, Makkar said according to their data the core message is that it is not necessarily sector-related tailwinds that are going to have a bearing on the improvement of the performance of the rated entities going ahead.

“A simplistic way to approach this would be to look at sectors that might see a good tailwind. We maintain our view that it's going to be entity-specific developments that are going to be driving the upgrades going ahead. Of course, there would be sectors like ferrous metals or nonferrous metals where a general uptick in the price cycle is going to take all the players up. The tide is going to take all the players up, but that cannot be said for sure for most of the sectors,” he cautioned.

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(Edited by : Anshul)