Mumbai: Credit rating agencies are not concerned as yet about the overall gro-wth story and fundamentals of Indian firms despite the turmoil in global financial markets and a significant amount of bad news from banks and companies over the past week, but they say the cost of borrowing for Indian firms will increase and consequently affect long-term growth.
Global rating agency Standard and Poor’s (S&P) and two domestic firms, Fitch Ratings and Icra Ltd, an associate of Moody’s Investor Service, say it’s too early to start downgrading Indian firms and ba-nks, though they see the country’s automobile, automobile ancillary and real estate secto-rs going through a slowdown.
Moody’s Investors Service does have a negative outlook on three companies—Indian Oil Corp. Ltd, Tata Power Co. Ltd and Tata Steel Ltd—but this has nothing to do with recent developments in the market. The negative outlook is because of their aggressive expansion and acquisition plans. The agency has also placed Tata Chemicals Ltd and Tata Motors Ltd under review for a rating downgrade. Moody’s rates 12 Indian companies.
Tony Tsai, senior vice-president at Moody’s corporate finance group, said: “The meltdown of the stock market will no doubt (be a) hurdle to Indian corporations’ capability to raise capital.”
Rating agencies say Indian firms will have to live with the fact that the cost of raising capital from international markets will remain high. The cost of borrowing for Indian firms has gone up from 100 basis points over the six-month London interbank offered rate (Libor) to 400-500 basis points over Libor over the past six months. They do not see this correcting in a hurry. Libor is a benchmark base lending rate.
Companies could decide to defer their capital expenditure plans, but they will not be able to do so indefinitely without hurting their growth, rating agencies say. According to R. Ravimohan, managing director and regional head, South Asia, S&P, raising money is not an issue, but the cost of money is. “At the present price level, issuers are not issuing new instruments hoping that the market will recover and investors are also not willing to pay more,” he said.
At a time when global markets are in the grip of a credit crunch, Indian firms have had no respite from bad news. Over the past week, ICICI Bank Ltd, India’s second largest lender, disclosed it had written down $264 million of investments in credit derivatives. Larsen and Toubro Ltd, India’s biggest engineering firm, admitted that one of its subsidiaries could lose $49 million because of commodity hedging bets that went wrong. In addition, industrial production in January slowed to 5.3% from 10.9% a year ago.
India companies are projected to be sitting on a $3-5 billion notional loss on their exposure to foreign exchange derivatives, which currency expe-rts said could be just the tip of the iceberg. The Bombay Stock Exchange is reflecting the bea-rish sentiment. On Thursday, the 30-share benchmark index, Sensex, lost 770.63 points to close at 15,357.35, down 4.8% from its previous close and its lowest level since August last year. The Sensex has lost nearly 25% since January.
“With the stock market meltdown, bank loans or convertible bond are likely to be tapped. As a result, leverage of Indian corporations will increase,” said Tsai of Moody’s. The rating agency will “closely monitor these developments and relook at ratings if needed,” he said.
Ravimohan of S&P, however, said although financial markets are going through a downturn, “most of their operations are going on well.”
According to an estimate of Crisil, a domestic rating agency, about Rs65,000 crore is under investment and a further Rs70,000 crore is being proposed for investment projects in India.
Naresh Takkar, managing director of Icra, said it would be premature to conclude that Indian firms are hugely affected by the global turmoil and thus ratings from his firm are not being revised now. “Ratings depend on environmental factors. If the access to equity market continues to be difficult over a longer period of time and companies continue with their investment plans, obviously it will have a negative impact on their balance sheet. If the situation continues like this, maybe there would be scaling down of projects, which will have a macro-level impact,” Takkar added.
Speaking on ICICI Bank’s losses, Ananda Bhoumik, senior director, Fitch Ratings, said: “60% of ICICI Bank’s exposure in the credit derivatives portfolio is to Indian corporates and there is no material direct or indirect exposure to US subprime credit.” Other Indian banks with an overseas investment portfolio have lower provision requirements, not only due to their smaller portfolio sizes but also because their exposures are mostly to derivative instruments issued by Indian corporates, instruments that currently have lower price volatility compared with derivative instruments of other international entities.
“Although we are concerned over the current situation and are closely monitoring developments, we do not see any rating pressure for the time being on any of the rated Indian banks,” said Nondas Nicolai-des, analyst, financial institutions group, at Moody’s. Acco-rding to him, ICICI Bank’s losses will not have any significant impact on the bank’s capital levels. “However, if such write-downs continue in the next 12-18 months to a point where the bank’s capitalizati-on may be significantly affected or any of its foreign subsidiaries would be in need of fresh equity or its bottom line is severely impacted, then we will relook at the ratings,” he said.
“I feel there is still strong appetite for Indian bank stocks and that postponing an IPO might only be a short-term measure. For the time being, no ratings are affected by the capital market conditions, ” he added.
Rakesh Valecha, senior director, corporate ratings, at Fitch, has a negative outlook for sectors such as auto. “The slowdown in the auto sector is a reflection of various factors, including the inherent cyclicality of the industry, tighter liquidity and higher interest rates. We expect the low growth rate environment to continue through the remainder of fiscal 2008 and part of fiscal 2009,” he said.