The credit quality of India Inc. continued to strengthen in H1 FY2023, carrying on with the momentum set in motion since the beginning of FY2022. In H1 FY2023, as also in FY2022, instances of rating upgrades by ICRA were over three times that of downgrades. With ICRA upgrading the ratings of 18% of its portfolio entities in H1 FY2023 on an annualised basis (and prior to that an equally high 19% in FY2022), the upgrade rate reflected a significant mark-up over the past 5-year and the past 10-year average of 11%.

Ratings Performance Data:

H1 FY2021	H1 FY2022	H1 FY2023		FY2021	FY2022
No. of upgrades	94	303	250		282	561
No. of downgrades	200	108	76		316	184
Credit Ratio	0.5	2.8	3.3		0.9	3.0

The upgrades in the just-concluded half-fiscal were concentrated in a few sectors. Real estate, textiles, financials, engineering, construction, and roads sectors constituted the upgrade leaderboard for H1 FY2023. These six sectors accounted for almost half of the total upgrades by ICRA in H1 FY2023, while constituting one-third of ICRA’s rated portfolio.

• A predominant majority of upgrades in the real estate sector were those of entities that are engaged in the leasing of commercial office space or warehousing assets wherein project completions, healthy leasing activity, and/ or loan refinancing at more favourable terms improved their credit profiles. Also, many entities upgraded were backed by relatively stronger sponsors.

• In the textiles sector, ICRA upgraded the ratings of several branded apparel manufacturers/ retailers as their business swelled on the back of the tailwinds of formalization, including the shift in customer preferences towards branded wear. Also, select entities that are engaged in leather garment and woven apparel exports were upgraded as they experienced a strong overseas demand post the pandemic.

• In the financial sector, several small to mid-sized NBFCs with a loan book ranging between Rs. 500 Crore to Rs. 10,000 Crore, showing a track record of consistent business growth while maintaining/ improving asset quality and capitalization metrics witnessed upgrades. The ratings of three banks were also upgraded as their earning profile were expected to sustain their improving trend with further improvement in their solvency/ capitalization metrics seen through fresh equity capital mobilization.

• The credit profile of several engineering and construction sectors entities is seen to be benefiting from their healthy order books and steady execution pace, supporting upgrades. The order books of construction entities are benefitting from the public investment projects in irrigation, roads, water supply, underground tunnelling, and metro works. These apart, the ratings of select construction entities were upgraded based on the increasing diversification of their order book, including orders for the construction of data centers, a sub-segment with a relatively lesser competitive intensity. Likewise, several entities were upgraded—that manufacture engineering items straddling across transformers, smart meters, solar modules, elevator guide rails, material handling systems, and non-automotive forgings—in view of their growing order book and manageable working capital intensity.

• In the Roads sector, several annuity-based and hybrid annuity-based projects were upgraded driven by reasons including reduction in execution and funding risks following project completions, and timely commencement of the semi-annual annuity payments from the concession authority, assuaging revenue risks.

 The rating downgrade rate at 5% remained on a leash in H1 FY2023 (6% in FY2022) in comparison with the past 5-year average of 12% and the past 10-year average of 9%. The business rebound post the pandemic, limited capital expenditures and hence restrained fresh term borrowings, and organic reduction in the existing balance sheet debt kept the incremental downside credit risks low. The reasons for downgrades were entity-specific, including 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. If the instances of downgrades in H1 FY2023 were low, occurrence of defaults was seen to be even lower. There were only five defaults in ICRA’s portfolio in the recent half-fiscal, compared with 42 in FY2022 and 44 in FY2021, with four out of the five defaults being from the non-investment grade.

The above trends indicate that India Inc. has shown notable resilience in terms of maintaining and even strengthening its credit quality, against the backdrop of multiple exogenous factors in the form of geopolitical conflicts, supply chain disturbances, volatile energy prices, and the actions and reactions of monetary policy interventions across the world. These developments have manifested in inflationary pressures, interest rate hardening, and the weakening of the Indian currency against the US Dollar.

With commodity prices receding from their recent peaks and with trends in softening export demand, ICRA revised its outlook on the Ferrous Metals, Non-Ferrous Metals, and Textiles (Cotton Spinning) sectors to Stable from Positive in H1 FY2023. This implies that the realisation growth-led upward rating inducements in these sectors that were strongly at display in FY2022, are unlikely to drive rating actions in these sectors in the near term. ICRA also revised its outlook on the Retail (Fashion) and the Airport Infrastructure sectors to Stable from Negative in recent months as the operating metrics in these sectors are on their path to rebounding to their pre-Covid levels. The sectors that continue to remain on a Negative outlook include Airlines, Media and Entertainment (Exhibitors and Print), and Power (Thermal and Distribution). In comparison, two sectors are currently on a Positive outlook viz., Oil and Gas (Upstream) and Roads (Toll).

Commenting on the overall developments, Mr. K. Ravichandran, Chief Rating Officer, ICRA, said, “We forecast India’s GDP to grow by 7.2% in FY2023 as against 8.7% in FY2022 and -6.6% in FY2021 as the demand for contact-intensive services remains buoyant and a pick-up in private and government capital expenditure looks on the anvil. A significant hardening of interest rates, however, is a risk factor that would impact discretionary spending, make debt less affordable, and restrain capex. Further, an escalation in geopolitical conflicts, a global recession, and global fund flows (inter-related, not distinct factors) would challenge India’s macroeconomic fundamentals, even if not as much in relation to the other economies. These factors, directly or indirectly, would have a bearing on the credit quality trendlines, looking ahead.”