Indian companies, which have posted nine straight quarters of declining profitability on average, are likely to see earnings rise in the coming quarters due to falling commodity prices, Crisil ratings said.
“Based on an analysis of the aggregate financials of 280 large companies across 28 key sectors, CRISIL estimates that EBIDTA margins will improve by 20 to 40 basis points in the quarter ended September 2012,” the ratings agency, a unit of Standard & Poor’s, said.
It said, on average, the operating (ebitda) profit margins at Indian companies have been falling continuously for the last nine quarters.
“Corporate India’s profitability appears to have bottomed out, primarily because of softening in commodity prices. GDP growth picked up marginally to 5.5 per cent in the quarter ended June 2012 from 5.3 per cent in the previous quarter. CRISIL expects GDP to grow at 5.5 per cent in 2012-13, and to improve further in 2013-14,” said the agency, which rates companies based on their credit quality, or ability to pay back loans.
The poor earnings has in turn affected the credit ratings of companies as the proportion of their debt loads increased, when compared to their profits. As a result, Crisil said, 3 out of every 5 rating change was negative in the first half of the year.
CRISIL’s credit ratio (ratio of upgrades to downgrades) declined to 0.66 in H1 of 2012-13 from 0.91 in H2 of 2011-12, primarily on account of slowdown in economy. In the six months ended September, —there were 484 downgrades and 320 upgrades out of a total of 10,542 ratings that the agency has. A higher credit rating helps companies source cheaper loans.
“The downgrades were driven largely by slowing demand and pressure on liquidity, because of stretched working capital cycles. Of the 484 downgrades, 183 were to ’default’ category—these were primarily from rating categories ‘CRISIL BB’ and lower, which are inherently more vulnerable to defaults,” it said.
Around a third of the downgrades has been among the highly-indebted industries, including power, construction, engineering and capital goods, and textiles, it said.
The highest upgrade rates, on the other hand, were in the retail consumption-linked sectors, such as packaged foods and home furnishing.