“Corporate India is in a precarious situation right now. While earnings have remained flat in the last few years, industrial recovery has not improved. Companies are going slow on capital expenditure and capacity utilisation is not picking up,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.
He added there could be more downgrades among mid- and small-cap companies, as many of these did not have earnings to support debt servicing.
The previous downgrades cycle had started in 2009-10 after the global recession. With a pick-up in global commodity prices, their number declined significantly. The ratio of upgrades to downgrades for both listed and unlisted companies increased to 2.26 in 2016 from 1.32 in 2015.
Banks and telecom companies are most affected in the current spell of downgrades, with debt instruments of Reliance Communications, IDBI Bank, and Central Bank, among others, being downgraded. Reliance Communications was recently downgraded to default and the rating of Idea Cellular was put under watch by two agencies.
The downgrades in banking and telecom are not high in number but are significant in value. The combined debt of these four companies is over Rs 1 lakh crore.
The banking sector has in the last few years been crippled by a sharp increase in non-performing assets (NPAs). Lenders have become cautious, leading to a fall in credit growth among public sector banks. However, analysts expect a recovery in the sector in the next two years.
“The bulk of the stress in banks has been recognised in the asset quality review. We have seen a moderation in slippage in the last few quarters. Moreover, recovery in small-value accounts has accelerated,” said Alpesh Mehta, deputy head of research, Motilal Oswal Securities.
Telecom companies are expected to be under pressure because of decreasing margins and heightened competition. “Telecom companies are facing competition not only from new entrants but also from internet-based apps. Recovery in the sector is not possible soon,” Chokkalingam added.