Credit fundamentals at all-time high: CRISIL

According to Roopa Kudva, executive director and chief rating officer, "CRISIL's modified credit ratio is at an all-time high, indicating very strong credit fundamentals in the Indian corporate sector. Although high oil prices, or a potential slowdown in the global economy, might lead to deceleration in growth, CRISIL expects the strong credit quality of Indian corporates to hold through the medium term."

CRISIL's Ratings Round Up for 2004-05 shows that the modified credit ratio (the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations) hit an all-time high of 1.16, passing the previous high of 1.06 recorded in 1994-95. This was driven by the manufacturing and finance sector's modified credit ratio (MCRs), which reached 7-year highs of 1.13 and 1.27 respectively.

In FY 2004-05, CRISIL's rated portfolio witnessed 26 upgrades, a downgrade and a default. Given that this 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 trends, and of underlying business fundamentals. The rising modified credit ratio thus signifies corporate India's improved business and financial performance.

The corporate sector's initiatives in cost cutting and value engineering, coupled with lower finance costs, have contributed to sustainable improvements in competitiveness across sectors. According to G V Mani, Director, Rating Criteria and Product Development, CRISIL, "Our rated corporates have used this phase of high accruals to strengthen their balance sheets, and are therefore better placed to cope with incipient margin pressures or any future slowdown."

Strong demand, coupled with modest capacity addition in the recent past, has resulted in high operating rates across key industries. With improving business confidence, low real interest rates, and a booming equity market, corporate India has stepped up its capital expenditure, as was predicted in CRISIL's April 2004 Ratings Round Up. However, in spite of higher capital expenditure, the debt protection measures for companies in CRISIL's portfolio are expected to remain strong due to stronger balance sheets and improved profitability.

Rating Outlooks, assigned by CRISIL since September 2003, have again proven to be leading indicators of the likely direction of rating movements. The year 2004-05 began with five companies having positive outlooks; all of these were upgraded during the year. At present, the fact that 97 per cent of CRISIL's outstanding ratings have stable outlooks presages high stability for these ratings over the medium term.