Despite the severe second COVID wave, corporate credit profiles showed strong improvement, with more rating upgrades than downgrades witnessed in the first half of the current fiscal. The increase in upgrades of corporates reflects a sharp and sustained recovery in demand, rating agencies said.

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Three domestic rating agencies - Crisil Ratings, India Ratings and Research, and Icra Ratings on Friday came out with their reports on the performance of their rated companies during the first half of FY2022.

In the April-September period, Crisil Ratings saw its credit ratio increasing further to 2.96 times, with 488 upgrades and 165 downgrades.

India Ratings and Research upgraded the ratings of 150 issuers while downgrading ratings of only 49 issuers during this period. The corporate downgrade to upgrade ratio (D-U ratio) was at a low of 0.3 (1HFY21: 2.1; FY21: 1.4). India Ratings said for comparison of FY22 performance, FY19 has been used, as the performance in FY20 and FY21 was impacted by the pandemic.

Icra Ratings upgraded the ratings of 303 entities, reflecting an improvement in the credit profile of 10 percent of the portfolio entities. At the same time, with only 163 instances of downgrades in H1 FY2022, the incremental pressures on the credit quality of India Inc - because of weak economic growth and the pandemic seem to have largely subsided, Icra said.

Crisil Ratings Managing Director Gurpreet Chhatwal said, “A sustained recovery in domestic demand, government impetus to infrastructure spending, and export growth, spurred by a buoyant global economy as well as the 'China plus one' sourcing strategy of global players, have led to a strong rebound in business risk profiles of India Inc, thereby driving the increase in upgrades”. Among manufacturing sectors, steelmakers benefitted from a combination of strong global demand and production cutbacks in China owing to environmental concerns, leading to high realisations, Crisil said.

Pharmaceuticals and speciality chemicals also sustained their strong performance trajectory, backed by global demand, it added. The services sector, too, is finally turning the corner after a debilitating fiscal 2021. Its credit ratio rose to above 1 time for the first time since the onset of the pandemic, on the back of select sectors, Chhatwal said.

Crisil said its outlook for India Inc's credit quality remains 'positive'. India Ratings said, unlike the first wave, business disruptions were limited as corporates remained operational, adapting to the new normal and faced limited supply-side disruptions. Supportive monetary and fiscal measures such as the RBI's Resolution Framework 2.0 for MSMEs, Emergency Credit Line Guarantee Scheme available till FY22-end and the central government's relief package targeting stressed sectors have supported in sustaining the credit profiles, it said.

Crisil said with India Inc on a stronger footing, the financial sector is better placed today than it was a year ago. Improving capitalisation levels and provisioning coverage ratios have strengthened the banks' balance sheets. The outlook on credit quality for the financial sector, especially banks, is stable, it said. However, challenges persist in the retail and MSME loan segments as smaller borrowers have seen outsized the impact of the pandemic. Banks' non-performing assets are expected to increase to 8- 9 percent by March 2022 from around 7.5 percent in March 2021, Crisil said.

A potential third wave is the key near-term risk to our 'positive' credit quality outlook, Crisil Ratings Senior Director Somasekhar Vemuri said. Icra Ratings said notwithstanding the large proportion of upgrades, the underlying business fundamental metrics across most sectors (even those that have seen the most upgrades) are unlikely to exceed the pre-COVID levels in the near term. At best, these are only expected to catch up. Thus, the traction seen in upgrades lately need not evoke a pigeon-holed conclusion of a broader upturn. The upgrades are not exactly what they seem to be, Icra said.

As for downgrades, the contact-intensive sectors continued to face credit pressures with Icra having downgraded several entities in the hospitality and the aviation sector in H1 FY2022. India Ratings said the pace of rating upgrades is expected to remain healthy, though may slightly moderate in the second half of FY22. However, the residual impact of the pandemic continues to hold its sway on the credit profile, it added.