'India Inc credit quality on slippery wicket'

India's leading rating agency CRISIL on Monday said it analysed 2,481 firms in the country which is rated ‘BBB-’ and finds that a fourth of these firms were highly vulnerable to demand slowdown and a sixth to liquidity constraints.

CRISIL Ratings President Ramraj Pai highlighted, “Working capital management emerged as a clear differentiator of credit quality. Firms with longer working capital cycles – or gross current assets (GCA) exceeding 240 days of sales - have witnessed twice the number of downgrades compared with upgrades.”

On the other hand, Pai said, “Firms with prudent working capital management, as indicated by low GCAs of less than 120 days of sales, witnessed more upgrades than downgrades,” he added. Power, road transport and construction sectors had the highest downgrade rates.

“Despite the tough economic environment, we continue to see rating upgrades. Almost 40 per cent of the upgrades were driven by firm-specific factors such as satisfactory track record of timely debt servicing by firms that were previously rated default grade, and an improvement in capital structure following higher-than-anticipated equity infusions or reduction in debt,” he said.

“Another 25 per cent,” he pointed out, “was due to better business conditions for firms that are not dependent on investment demand such as textiles, agricultural products and packaged foods sectors. These sectors witnessed the highest upgrade rates.” CRISIL’s credit ratio, or the proportion of upgrades to downgrades, for the first half of the current fiscal ended September 30 has come in at 0.87 times. The ratio has stayed under 1 for the last two years. This time around, there were 478 downgrades to 417 upgrades. As much as 86 per cent of the downgrades were due to demand slowdown and stretch in liquidity (caused by delays in receivables).