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

The MCR for financial sector and infrastructure sector ratings stood at 1.0 for the first half of the year, indicating stability in credit fundamentals for these sectors.

Overall stability for corporate India is also predicted by the distribution of CRISIL's ratings outlooks. Ratings outlooks, assigned by CRISIL since September 2003, have proven to be leading indicators of the overall movement of credit fundamentals.

According to Sreenivasa Prasanna, head, rating criteria and product development, CRISIL, "With over 97 per cent of CRISIL ratings carrying 'stable' outlooks, and no rating carrying a 'negative' outlook, corporate India is fundamentally well placed to face challenges of increasing competition and pressure on margins."

MCR dips after a record high
CRISIL's modified credit ratio (MCR) is defined as the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations. In H1 / FY06 (April 2005 to September 2005), CRISIL's annual MCR for long-term ratings steadied at 1.05, declining from the previous high of 1.16 recorded in FY05. The MCR reflects six upgrades and one downgrade (See table) in CRISIL's long-term ratings portfolio (CRISIL's portfolio of Fixed Deposit ratings featured 4 upgrades and 0 downgrades.)

CRISIL's Long-Term Rating Upgrades in H1 2005-06
Sr.No	Company	Industry	Rating From	Outlook From	Rating To	Outlook To
Manufacturing Sector
1	Indian Petrochemicals Corporation Ltd.	Petrochemicals	AA	Stable	AAA	Stable
2	VST Industries Limited	Cigarettes	AA	Stable	AA+	Stable
3	Gujarat Ambuja Cements Limited	Cement & Cement Products	AA+	Stable	AAA	Stable
4	Soma Textiles & Industries Limited	Textile - Cotton	BB	Stable	BB+	Stable
5	Uttam Galva Steels Limited	Steel	BBB+	Stable	A-	Stable
6	Carborundum Universal Limited	Abrasives	AA	Positive	AA+	Stable

Downgrade rate remains at 10-year low
CRISIL's long term downgrade rate – defined as the ratio of total downgrades to outstanding ratings – remained flat at the 10-year low of 1.32 per cent recorded in FY05, as no default was recorded in the first half of FY06.

Rating trends and macroeconomic linkages
CRISIL MCR is a sensitive measure of industrial performance and prospects as it covers a wide range of sectors and key players in each sector. In line with predictions in CRISIL's Ratings Round-Up of October 2004 and April 2005, the performance of the industrial sector continues to be strong. Chart 3 below shows that the growth in the Index of Industrial Production (general), at 9.4 per cent for the first half of FY06, scaled yet another 10-year peak.

In addition, a high MCR presages strong GDP growth. The buoyant growth in GDP for the third year in succession follows the third consecutive year with MCR at levels of 1.0 or more.

It should however, be noted that the MCR has dipped after three successive years of increase. This implies that going forward, growth rates could slow down from the highs witnessed in the recent past.

Sectoral Analysis
The manufacturing sector accounted for all the upgrades and the downgrade, and recorded a sectoral MCR of 1.11. This is lower than the 1.13 recorded in FY05, which was the highest MCR ever recorded by the sector. The finance and infrastructure sectors had a stable MCR of 1.0, indicating a consolidation of their improved position of the previous two years.

The six upgrades in the manufacturing sector were spread over different industries, indicating broad-based improvements in credit quality. The single downgrade was that of Hero Cycles, which faces the combined effect of three factors: volume decline, rising input prices, and exposure to weak group companies.

Manufacturing sector: Growth to plateau
A large number of industries in the manufacturing sector continue to show strong performance due to buoyant demand. Profitability has also improved across rating categories in this sector. Increased investor confidence and the increasing global competitiveness of the Indian corporate sector, coupled with strong growth in the construction, automobile and infrastructure sectors have kept demand buoyant for the manufacturing sector.

However, significant increases in oil prices, plateauing of growth rates in some key industries, infrastructure constraints and hardening real interest rates, will be immediate challenges facing the Indian manufacturing sector, impacting growth trajectory. In addition, with most manufacturing sectors operating at high capacity utilization levels, significant growth over the medium to long term will call for fresh investments, and consequent exposure to associated risks.

In this scenario, the strong credit position of CRISIL-rated corporates is expected to lend stability to their performance over the medium term.

Infrastructure sector: Government policy to determine stability
In line with the predictions in CRISIL's Ratings Round-Up of April 2005, the credit quality of infrastructure sector entities remained stable, with no upgrade or downgrade during the first half of FY06. The realisations of mining sector entities are currently growing strongly due to demand-driven increases in prices; if sustained, this trend can lead to further strengthening of the credit quality of these entities.

However, increasing oil prices are affecting the financial performance of public sector oil companies. The timeliness and adequacy of government action will be a key monitorable for the credit profile of these companies.

Finance sector: Parent / government support to drive stability
The financial sector showed stability with an MCR of 1, indicating that there were no upgrades or downgrades in this sector. The credit profile of financial sector entities will continue to receive the benefit of support from government or strong foreign parents, thus lending stability to their overall credit risk profile.

Debt protection levels remain strong
As was pointed out in CRISIL's Ratings Round-Up of April 2005, the additions to capital in FY05 were supported by strong debt protection measures, a trend that continues to hold in the first half of FY06. Over the medium to long term, however, CRISIL believes that the growth without compromising capital structures will be a key determinant of sustained credit quality.

Source: Data of more than 200 CRISIL rated companies in the manufacturing and infrastructure sectors.

Stability of ratings to continue
Rating Outlooks, assigned by CRISIL since September 2003, have proven to be leading indicators of the likely direction of rating movements. At the end of FY05, the proportion of ratings carrying stable outlooks had increased to 97.3 per cent from 90.64 per cent at the beginning of the year, indicating high stability of CRISIL ratings over the medium term (refer Chart 8).

This has indeed come true with the MCR for long-term ratings decreasing to 1.06 for the first half of FY06 from the high of 1.16 for FY05. The distribution of outlooks at the end of September 2005 indicates continuation of the stable outlook for CRISIL's ratings over the medium term.

CRISIL's Long-Term Rating Downgrades in H1 2005-06
Sr.No	Company	Industry	Rating From	Outlook From	Rating To	Outlook To
Manufacturing Sector
1	Hero Cycles Limited	Cycle & Cycle Components	AA+	Stable	AA	Stable

CRISIL's Fixed Deposit Ratings Upgrades in H1 2005-06
Sr.No	Company	Industry	Rating From	Outlook From	Rating To	Outlook To
Manufacturing Sector
1	Jindal Saw Limited	Steel Products	FA-	Stable	FA+	Stable
2	Kirloskar Oil Engines Limited	Engines Diesel	FA+	Stable	FAA	Stable
3	VST Industries Limited	Cigarettes	FAA+	Stable	FAAA	Stable
4	Indian Petrochemicals Corporation Ltd.	Petrochemicals	FAA+	Stable	FAAA	Stable