Mumbai: Indian companies’ appetite for acquisitions, rising raw material costs and firm rates have pressured their credit quality and caused more downgrades than upgrades for the first time in five years, a rating agency said.
Crisil, majority-owned by international ratings agency Standard and Poor’s, said in a study released on Thursday, 11 October, that it had downgraded seven Indian firms during April-September, against one upgrade.
“The reversal is driven by large debt-funded acquisitions and capacity expansions by corporates, reflecting their increasing risk appetite,” it said.
Among the downgrades were Tata Steel Ltd, which acquired Corus for $13 billion largely funded by debt, and Hindalco Industries Ltd that bought Canada’s Novelis Inc in an all-cash deal for $3.5 billion and also assumed its debt for $2.4 billion.
The manufacturing sector accounted for most of the ratings actions with one upgrade and five downgrades, while there were two downgrades in the infrastructure sector.
“The increase in the proportion of negative outlooks also indicates a possible deteoration in the credit quality of Indian corporates over the short to medium term,” Raman Uberoi, senior director-ratings at Crisil, said in a statement.
Indian firms may face profitability pressures in the coming months due to higher input costs and as larger chunks of debt in their books are exposed to firm rates.
The Reserve Bank of India (RBI) has increased interest rates five times since mid-June 2006 and raised banks’ cash reserve requirements by 200 basis points since December.
However, Crisil said the downgrades were not worrying signs yet as these have been one to two notches, but they remained in the high investment grade.
“Going ahead, we expect credit quality to be increasingly driven by companies’ success in integrating acquired entities and managing capacity expansions,” Roopa Kudva, managing director at Crisil, said.
Other companies to be downgraded were Tata Power Co Ltd, India Glycols Ltd, Electrosteel Castings, Essel Mining and Industries Ltd and Indian Farmers Fertiliser Cooperative Ltd.
The sole upgrade was Soma Textiles and Industries, Crisil said.