Crisil Rating Action Ratio, that indicates the relative frequency of upgrades and downgrades, has fallen to 1.03 times in the first half of 2011-12 from 1.10 times in 2010-11. This means there are more downgrades that is taking place.

According to a news report, 'during the first half of the FY2012 313 companies were upgraded in ratings, meanwhile another 207 companies saw a downgrade from a universe of about 7,500 companies.'

In the previous year, FY2011 had upgraded 605 companies and downgraded 269 companies from an universe of around 6,100 companies.

The interesting part was that lower rated companies were downgraded most of the time. This indicates that profits for smaller companies’ are more susceptible to high interest rate environment.

Earlier in April 2011 on corporate India’s credit quality, CRISIL had anticipated such a downward move, primarily on account of profitability pressures, and had also identified demand scenario as a key to monitor.

CRISIL believes that the slowing down of demand across a wide range of sectors over the second half of 2011-12 could reduce its RAR further.

Roopa Kudva, Managing Director and Chief Executive Officer, Crisil says, “While the RAR has already started moving down on account of profitability pressures, we are expecting further downward pressure, primarily driven by demand moderation."

"Signs of demand moderation are visible. Our analysis reveals that 10 of the top 20 industries (in terms of loans outstanding of the Indian banking system) are showing clear signs of slowdown in growth,” she further added.

Sectors that will be affected

Consumption-linked industries such as automobiles, real estate, textiles, and retail have seen significant impact on demand. Crisil Research has cut its growth estimates for passenger vehicles close to decadal lows of 2-4%.

Investment demand-linked industries such as cement, capital goods, and construction have also witnessed decline in sales growth.

Exports are buoyant so far, slowdown in the US and the uncertain environment in Europe are expected to result in a moderation in export growth.

If the demand moderation leads to a lower revenue growth of 15 per cent in 2011-12, Crisil’s analysis on its sample portfolio of 5500 rated companies reveals a clear weakening of credit quality of the Indian corporate sector. The interest cover ratio of the corporate portfolio is estimated to decline from 4.8 times in 2010-11 to 3.5 times in 2011-12.

Ramraj Pai, Director, Crisil Ratings, state: “Other increased risk factors include greater vulnerability to unhedged foreign exchange exposures, given the sharp movement in the foreign currency rates recently."

He further adds that access to global funding may be adversely affected by increased risk aversion by global investors due to the uncertain global economy.

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