Consolidation Has Changed the Game

A cement analyst in the late 90s would have seen a spate of downgrades during a downturn. However, now with consolidation, we are seeing resilience with pricing and balance sheet discipline. Even in the sector that is regarded as most volatile, namely real estate, we see the top companies perform better as home buyers understand the risk of an incomplete project or shoddy construction. So the cash flows of Tier 1 builders are strong.

Regulations have become an enabler

Good regulation makes growth sustainable rather than stifle it. RERA has fundamentally changed cash flow management in real estate by ring-fencing project funds in escrow accounts. In segments like gold loans and lending against securities, where asset values provide credit protection, calibrated tightening by SEBI and RBI has ensured that growth stays with risks contained.

Infrastructure is another example. The power and road sectors - once littered with stalled projects and stranded assets - have become far more investable as risk allocation between developers and government has been rethought, ensuring viable growth.

Data Is the Unsung Hero

Consider the informal entrepreneur - the poha vendor near a railway station. A decade ago, assessing their creditworthiness required disproportionate effort and human judgment. Today, Bureau scores provide a starting point and UPI transaction data, Jan Dhan bank accounts, and Aadhaar-linked identity have created a data trail that make analysis easier. Human intervention, when needed come via reference checks and the “black box” used for analysis. Technology has not only accelerated data processing - it has made it cheaper. As lenders reduce the cost of credit assessment, they can either lower rates for borrowers or build cushions against bad times.

Ideally, both.

The Two Actors Who Made It Stick

None of these matters without the right behaviour from the people who control capital, which leads to positive consequences across the Board.

Corporate promoters and management teams have learned (sometimes the hard way) to treat balance sheet strength as seriously as profit growth. Raising equity when needed, funding expansion through internal accruals, resisting the temptation to lever up during good times: these are at times difficult decisions, but they are the right ones. The market has rewarded this discipline through valuations, and employees have shared in it through ESOPs.

Investors and lenders have also recalibrated their approach. Reckless growth looking at India as a land of opportunity alone had only led to frequent accidents. Both equity and debt investors have sharpened focus on governance practices of companies and the quality of growth – growth with lower volatility is better rewarded.

Winter is coming? Maybe?

However, as always, risks are brewing, and it would be prudent the mind at least the known ones. The risk from de-globalisation could lead to greater risk premia. Tariff conflicts and geopolitical fractures are reshaping supply chains in ways that are still evolving. The oil shock can be worse than what the market expects – even if it comes to $80 a barrel, it will be a third higher than the $60 levels that we thought would say. And this is assuming availability is not an issue. There is already talk of el Nino impact on the monsoon, and if inflation makes a comeback, it will impact any over-leveraged household.

In the current environment, for corporates, resilience through turbulence is worth more than growth that merely flatters a quarterly number.

The Optimism of the Pessimist

Here is the paradox: the structural improvements described above - consolidation, regulation, data and discipline are things that give a credit analyst optimism that this cycle will be handled. However, “this time it’s different” can well be an epitaph. So true to form, credit analysts should remain pessimistic.