Mumbai: Rating agency Crisil Ltd has downgraded its rating on Aditya Birla Group company Hindalco Industries Ltd’s bonds by one notch from triple-A to double-A. The downward revision comes within a week after the agency downgraded its rating on India’s largest private sector steel producer Tata Steel Ltd’s bonds from triple-A to double-A+.
Crisil had placed both the firms under rating watch with negative implications, following their recent overseas acquisitions. Crisil has since removed them from its rating watch scan and given a stable outlook to Tata Steel.
Hindalco completed its acquisition of Canadian rolled aluminium products major Novelis Inc. on 15 May. Tata Steel concluded the acquisition of British steel giant Corus Group Plc. on 2 April.
A Crisil release said the downward revision in the long-term rating of Hindalco reflected the increase in risks after its largely debt-funded acquisition of Novelis. Similarly, in case of Tata Steel, the downward revision of rating reflects the impact of the Corus acquisition on the “combined entity’s financial risk profile”.
However, the new ratings continue to reflect Hindalco’s dominant position in the domestic aluminium and copper industries, Crisil said. The company accounts for almost half of India’s installed capacities of these metals. Hindalco’s product mix, for its aluminium business, has a sizeable proportion of value-added products (more than 60% of revenues); this contributes to some extent to the company’s high and stable margins. Crisil said ratings on Tata Steel reflected its strong position in the domestic steel industry, and its emerging global presence.
The downward revision of the ratings comes at a time when Indian metal companies have been doing rather well. The average net profit of 13 companies that constitute the metals index of the Bombay Stock Exchange (BSE) grew at a rate of 30.75% for the fiscal ended 2006-07, driven by a net sales growth of 23.84%. “For the past year, prices have been better,” said Rajat Rajgarhia, head (research) for Motilal Oswal Securities Ltd.
Hindalco shares rose 2.34% on a bullish day on BSE, closing at Rs164.05. Tata Steel shares also rose, up 3.15% to Rs614.15. Both the companies enjoy the benefits of being the lowest-cost producers in the world, mainly due to the advantage of having captive mines.
“Today, mergers and acquisitions are an integral piece of the strategic agenda of most Indian companies, and soare large capital expenditure plans to meet increasing demand in India’s fast-growing economy,” said Crisil’s chief rating officer Roopa Kudva. The Tata Steel-Corus combine will have a capital expenditure plan of more than Rs28,000 crore, to be spent over the next few years.