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Coping with adversity, India Inc ranks higher post-pandemic

Corporate credit rating upgrades continued to improve in the first half of 2022-23 on better financial metrics, business growth, and adequate liquidity. The deterioration in the business environment that was expected to temper the credit ratio – the proportion of upgrades to downgrades – has not materialised so far.

Rating agencies are reporting steady sequential improvement in India Inc’s credit profile. Indian companies have accomplished this over the past two years by deleveraging, managing supply chain disruptions and keeping a lid on costs. Those catering to purely domestic consumption have benefited from robust recovery in demand as pandemic restrictions were progressively lifted.

Large companies now have greater resilience over widening credit spreads and rising input costs. Most of them also have adequate internal accruals to fund capex and are, thus, shielded from the increase in funding costs. A small part of the debt they hold is in floating rates, which cushions them against the interest rate trajectory.

And their refinancing risk is also fairly limited. Adverse foreign exchange movements through raw material imports and unhedged debt exposure are expected to be less broadly felt than the positive impact of rupee depreciation.

Hardening interest rates and flight of capital are, however, likely to affect investment plans among smaller players. Export industries and small enterprises are particularly vulnerable to a global slowdown and liquidity tightening.

Besides, a broad- based private capex cycle is still some way off. Borrowing costs will eventually constrain consumption demand and that could lead to a moderation of the corporate credit profile, although deleveraging of balance sheets could continue.

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