India Inc’s upgrades trump downgrades

The key reasons prompting the rating upgrades during H2,2009-10 include improvement in operating performance,and in the capital structure of the issuers concerned following the easing of market constraints on raising funds.

With the business environment improving since Q2,2009-10,the outlook for most sectors servicing domestic demand has improved considerably. Only a few sectors,especially those with international linkages either in the form of export demand or foreign currency denominated transactions could continue to be impacted by global factors and exchange rate fluctuations. Further,access to credit and equity has improved considerably for the entities since Q2,2009-10.

Given these factors,Icra does not expect any downward pressure arising from sector-specific reasons on the rated entities. In fact,there is a likelihood of an upward revision in the credit profiles of these issuers,considering the positive developments. However,company- specific factors such as project delays,debt funded capital expenditure,leveraged mergers and acquisitions,and credit culture related issues,could lead to negative rating actions,given that factors both external and internal to an issuer influence its eventual rating.

Moreover,with the composition of the Icra-rated universe getting skewed towards lower rated issuers,the propensity of rating changes at the overall level is likely to remain on the higher side.

Fiscal 2009-10 may be seen as consisting of two distinct periods: the first quarter (Q1) of 2009-10,in which the effects of the economic slowdown of H2,2008-09 had spilled over; and the subsequent quarters when economic recovery gained momentum,said the report.

In line with the economic turnaround during this latter period,there has been a significant increase in upgrades in H2,2009-10,while a moderation in rating downgrades is also noticed. The key findings of the study are: The total number of rating upgrades as a percentage of the average number of issuers reported a consistent increase from 0 in H2,2008-09,to 2% in H1,2009-10,and further to 4.2% in H2,2009-10.

The total number of rating downgrades,which had peaked at 7.7% of the average number of issuers in H2,2008-09,moderated to 6.2% in H1,2009-10,before declining further to 5.9% in H2,2009-10.

A quarterly analysis of the rating actions during 2009-10 indicates that the inverse credit ratio declined from 5.13 in Q1,2009-10 to 1.18 in Q4,2009-10,driven primarily by a significant increase in rating upgrades.