With the overall slowdown hitting the Indian economy - as seen by the reduction in GDP to 6.5% in FY12 after clocking a growth of 8.4% in the preceding year - a host of issues began to hit India Inc. however, an area that had become quite the concern was (and still is) liquidity. With the reduction in growth rates coupled with expanding working capital requirements, concerns over liquidity started increasing.
And with the same happening, India Inc. started getting battered by rating agencies in the form of ratings downgrades.
According to Crisil, a leading credit rating agency, Indian companies continued to see downgrades during the first half of the current year i.e. 1HFY13. And this downgrading is expected to continue, albeit with lower intensity and severity.
Crisil's credit ratio, a ratio which is calculated by dividing the downgrades by the upgrades declined to 0.66 for the 1HFY13 period. For the same period last year, the ratio stood at 0.91. As per Crisil, there were 484 downgrades and 320 upgrades, on an expanded base of 10,542 ratings.
It is believed that companies forming part of capital intensive sector - power, construction, engineering/ capital goods, hotels, steel and textiles - formed a significant share of those companies that saw downgrades in the year till date. Apart from slowing demand, the pressure on liquidity was on account of stretched working capital cycles. However, it would also be good to add here that there have been recent announcements in the media that some companies from the construction and hotels spaces have announced plans to trim their debt levels and improve the overall health of their balance sheets. This they intend on doing by exiting some of the non-core businesses or selling off certain assets to raise funds; some have even gone in for capital infusion through various routes.
Amongst the stocks that saw upgrades included those which are involved in the retail consumption spaces. Some sectors include packaged foods and home furnishing.
All is not so grim...
While the above-mentioned data gives a picture of the pressures that Indian companies are facing, investors would find some respite in the rating agency's view of the negatives slowing down. With the overall economy and profitability showing signs of improvement (although at a slow level), the same would be the case for the abovementioned credit ratio going forward. The same would however, occur over the medium term. In the short term, the credit ratio would continue to be below the 1x level, indicating that the number of downgrades would be more than the upgrades.