Ratings agency CRISIL upgraded 506 companies in the first half of the year compared to 184 downgrades, resulting in an upgrade-to-downgrade ratio of 2.75, which is one of the better rates seen recently.

Similarly, ICRA’s upgrades were more than 2.2 times the number of its downgrades during the same period.

Discussing the sectoral trends, K Ravichandran, Chief Rating Officer at ICRA told CNBC-TV18 that China’s substantial production capacity negatively affected the chemicals market.

Within chemicals, while specialty segment recovered, the agrochemical segment was hit.

Other categories, such as petrochemicals and polymers, have a mixed performance and are positioned within the low to mid-range of the margin cycle.

The financials sector, Ravichandran said, remains overall healthy, but some segments are showing early signs of stress.

Companies involved in unsecured lending, personal loans, business loans, and microfinance institution (MFI) loans have faced difficulties in certain states, primarily due to aggressive lending practices.

Discussing the trends in infrastructure, Somasekhar Vemuri, Chief Criteria Officer and Senior Director of Regulatory Affairs & Operations at CRISIL Ratings, noted that credit quality trends have shown improvement over the past four to five years.

This positive shift in infra can be attributed to several factors, including increased participation of central counterparties in segments like renewable power capacities, which has provided greater assurance to stakeholders regarding payment security. This has resulted in a noticeable number of upgrades within the sector.

These are the verbatim excerpts of the interview.

Q: Excellent upgrade, downgrade. Is this the best-ever ratio we have at 506 to 184, or 2008 was perhaps the last such superb upgrade-downgrade ratio?

Vemuri: The number of 2.75 is amongst the higher ones that we have seen. But just after COVID, when there was a very sharp rebound in the economic demand the cash flows were very robust and companies were just intent on deleveraging, we did see a much higher number touching even 5.5 times in the last couple of years back. But yes, this is amongst the number which is amongst the higher side. 2.75 that we have seen in the first half.

Q: Ravichandran, would this also rank among the best for you? How does it compare historically?



Ravichandran: Historically, we have had an annual basis more than three times, especially in the financial year 2022. Since then, it has been moderating. We had about 2.2 times for the off-year ending September 24h.

Q: How are the number of downgrades doing? Are they falling or rising, if you only compare downgrades historically?

Vemuri: When we look at the number of downgrades, that’s 184. But when I look at it as a percentage of the overall base of about 7,000 companies, that came in at about 5.3% and yes, it is lower than our 10-year average of about 6.5%. So it is trending a little downwards. As well as if you look at another metric, which is defaults even default rate is also trending lower, at about 0.4% annualised. So that also indicates that there is resilience and buoyancy in terms of cash flows, which is there.

Q: On sector, who did very well. It looks like both of you have found chemicals and textiles on a weak footing. If you can explain, give me some nuances?

Ravichandran: In the case of chemicals, China has been the biggest spoil sport. They have huge capacities, more than 10 times bigger than India. Because of the slowdown in the construction sector in China, they are left with a huge overcapacity which they are flooding the market which is building in higher inventory and price-related impact. It has been in few cases, there are different sub-segments within that.

The deep impacted would be agrochemicals. Otherwise, if you look at the sector that has turned around would be specialty chemicals. Other chemicals like petrochemicals and polymers etc. they would fall somewhere you know in between in terms of impact. So most of them are in somewhere in the low to mid-end of the margin cycle.

Q: Both you and ICRA are pointing out that infrastructure has done very well. In fact Ravichandran’s note also points out that power more specifically renewables doing well. Can you tell us Infra has always been the one that was dragging the averages down, why are they looking good and is the outlook also good?

Vemuri: Coming to infra, over the last at least four to five years what we have seen is the credit quality trends have started showing an improvement. There are multiple reasons for that, which are there. If you look at segments such as renewable power capacities you are seeing a lot more participation of central counterparties, which is there, that is giving a lot of comfort to the stakeholders in terms of payment security. We are seeing a lot of upgrades there. Also contributed in part by the fact that there is lower debt, which is sitting compared to what we had expected in the renewables, as well as takeover by stronger sponsors, which is there.

Road projects, if you look at especially the hybrid annuity model (HAM) road projects, as they achieve milestones, and the project risk is reduced, so they naturally tend to reflect the counterparty risk, which is the National Highways Authority of India (NHAI) from which the annuities start coming in. So that is also a sector which is doing well.

The construction segment also is amongst the ones which has done well amongst the infrastructure and infrastructure-linked sectors because of fairly robust order execution. The capital goods segment is benefiting as a result of infrastructure spending. If you look at the overall infrastructure itself, 38% of the rating upgrades in our portfolio of the 506 I have mentioned are either infra or infra-linked in the first half.

When we looked at 12 different sub-segments of the infrastructure sector, we have a fairly positive outlook on almost all of them so the outlook also is fairly positive.

Q: What’s your sense about financials? The anecdotal news, RBI going after gold companies, unstructured debt, microfinance, is the financial sector as good as it was last first half?

Ravichandran: In the financial sector overall, still they are in a healthy position I would think. But within that there are certain segments showing signs of incipient stress. The companies that are dealing with unsecured loans, personal loans, business loans and MFI loans off late, they are seeing strains in few states, largely on account of unabated lending by the industry. The growth was upwards of 25-30% because of that and also the multiple leveraging by the borrowers it was a heavy combination resulting in stress in a few pockets.

Within MFI there are large MFIs who are not affected that deeply as compared to smaller MFIs I would think. They are well capitalised and they should be able to ride out this storm especially after the industry level guardrails which have been put forth by MFIN.

For full interview, watch accompanying video

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