Mumbai: A slowdown in demand is likely to pressure corporate earnings, hurting profits and hence ratings this fiscal year, credit rating agencies Crisil Ltd and Credit Analysis and Research Ltd (Care) said on Tuesday.
Demand is likely to moderate in consumption-linked sectors such as real estate, automobile, retail and textile, which have been hit by rising lending rates, Crisil said.
Sectors dependent on investments, such as construction, cement and capital goods, and export companies are also likely to be hit, said Pawan Agrawal, director, ratings, at Crisil.
Vulnerable sectors: A steel plant. Sectors linked to commodities such as coal and iron ore will be hurt more than other sectors, says Care
The agency upgraded its ratings on 313 companies and downgraded 207 others between April and September, compared with 605 upgrades and 269 downgrades in all of 2010-11.
The agency’s rating action ratio, which is an indicator of the relative frequency of its upgrades and downgrades, declined to 1.03 times in the first half of 2011-12 from 1.10 in 2010-11.
“This trend reflects an increasing pace of downgrades and a sharply declining pace of upgrades,” Crisil said.
Crisil’s rival Care upgraded 157 companies and downgraded 86 in the first six months of this fiscal year. It, too, saw its ratio of upgrades to downgrades fall.
“In the same period last year we upgraded 100 companies and downgraded 46 companies for a ratio of 2.17 times. It has since fallen to 1.82 times,” said D.R. Dogra, managing director and chief executive.
Care covers 2,763 companies and Crisil has 7,500 companies under its watch.
Fitch Ratings India and Moody’s-promoted ICRA Ltd said they did not have updated data on corporate upgrades and downgrades.
Crisil expects a slowdown in demand to restrict the ability of producers to pass on rising input costs to clients.
“According to our estimates, a 15% decrease in revenues together with a 225 basis points (bps) interest rate hike could impact profitability by 150 bps, leading to a 13% drop in pretax profit,” Agrawal said. One basis point is 0.01%.
Reserve Bank of India has hiked its policy rate 12 times since March 2010, the latest by 25 bps on 16 September as it fights persistently high inflation in the world’s second-fastest growing major economy after China.
“The pace of launch of new projects has reduced because of slower policy decisions, land acquisition problems and high interest rates, which means that it is taking longer for investment in sectors like cement, capital goods and iron and steel,” Agrawal said.
Dogra said sectors linked to commodities like coal and iron ore will be hurt more than other sectors, besides real estate.
“For the real estate sector it’s a double whammy because cost of funds are rising and demand has also reduced because of high rates. Now demand has started to be impacted, effecting the credit cycle. I foresee bad days ahead, which means more downgrades,” he said.
Roopa Kudva, managing director and chief executive at Crisil, said the agency sees more pressure on companies primarily as demand moderates. “Our analysis reveals that 10 of the top 20 industries (in terms of loans outstanding to the Indian banks) are showing clear signs of slowdown in growth,” she said in a statement.
Crisil's rating of 7,500 companies covers about 42% of the outstanding loans to banks.
Companies will also be hit by increased risk due to unhedged foreign exchange exposures, given the sharp movement in the foreign currency rates recently, said Ramraj Pai, director, Crisil Ratings.
The rupee has lost more than 9% of its value to the dollar since January as global risk aversion has forced investors towards the safer US currency.
“Access to global funding may be adversely affected by increased risk aversion by global investors due to the uncertain global economy,” Pai said.