Strong fundamentals shield companies from rising pressures: CRISIL

Corporate India's fundamentals continue to remain strong, according to CRISIL's analysis of trends in its ratings. CRISIL's modified credit ratio (MCR, the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations) has continued to remain above 1.0, implying strengthening credit fundamentals for CRISIL-rated corporates.

However, the MCR has dropped after three years of increase, indicating stiffer challenges for corporate India in improving its credit quality in the short to medium term. Given that CRISIL's rated portfolio covers key sectors of the Indian economy, and includes most of the top players in each segment, CRISIL's MCR stands out as a reliable indicator of systemic credit quality, and of underlying business fundamentals.

According to Roopa Kudva, executive director and chief rating officer, CRISIL, "This marks the third successive year of strengthening corporate credit quality, and is clearly reflected in the current buoyancy in economic fundamentals. However, the pace of improvement may be slowing down, implying the start of a consolidation phase. This is reflected in a lower MCR of 1.05 as compared to the all time high of 1.16 recorded for FY2004-05."

CRISIL's Ratings Round-Up for the first half of FY2005-06 indicates that the manufacturing sector led the improvement in credit fundamentals, recording an MCR of 1.11. The manufacturing sector had six upgrades and one downgrade during this six-month period. The Ratings Roundup, a semi-annual publication, analyses CRISIL's rating actions during a particular period and the linkages between these actions and underlying economic trends. Since credit rating is an opinion on likelihood of timely future debt repayments, an analysis of rating actions in a large and diverse portfolio of rated companies, can be useful indicator of economic prospects.

According to G V Mani, director rating criteria and product development, CRISIL, "What we have here is a broad-based improvement in business fundamentals and credit strength. CRISIL believes that significant increases in oil prices, plateauing of growth rates in some key industries, infrastructure constraints, and hardness in real interest rates, will be immediate challenges facing the Indian manufacturing sector."

"Additionally, with the manufacturing sector operating at high capacity utilisation levels, significant growth over the medium to long term will call for fresh investments, and consequent exposure to associated risks. However, the strong credit position of CRISIL-rated corporates is expected to lend stability to their performance over the medium term," adds Mani