Mumbai: The first signs that Indian companies are feeling the pressure of growing too fast are here. A combination of ambitious expansion plans and rising interest rates has started taking its toll on the credit quality of Indian corporations.
A recent analysis by Icra, an Indian affiliate of global rating agency Moody’s Investor Services, shows that the number of ratings downgrades increased marginally to five in 2006 from four in 2005. What is more significant, however, is the fact that the ratio of upgrades to downgrades is falling. In 2005, for instance, there were 12 upgrades and four downgrades. In contrast, in 2006, there were six upgrades and five downgrades.
Icra interprets this phenomenon as “some moderate signs of weakness in the rating transition trends”.
The agency has downgraded firms in sectors such as pharmaceuticals, two-wheelers, electronics and fast-moving consumer goods, besidesfinance.
An Icra note says the number of upgrades continued to exceed the number of downgrades in 2006 but admitted that the number of upgrades have fallen sharply in the year.
In its semi-annual study of rating actions, another domestic rating agency, Crisil, majority owned by Standard & Poor’s, indicates that pressure on credit quality is increasing.
Crisil’s ratio of upgrades to downgrades has declined between April and September 2006 to 1.00, from a level of 1.03 in 2005-06. “For the first time since Crisil started assigning outlooks in 2003, the number of entities with negative outlook exceeds the number of entities with positive outlook. This leads us to expect an overall weakening of fundamentals,” says Roopa Kudva, executive director and chief rating officer at Crisil.
“Some entities in the sectors mentioned in our report have had downgrades because of both external and internal factors. Some have been influenced by a changing regulatory environment which has exposed them to higher duty rates. There are others who have not been able to cope with intense competition,” says Naresh Takkar, managing director, Icra.
He also says there are other corporations which borrowed heavily in 2006 for acquisition funding and mentions that Icra feels they are overleveraged. “While this is not to say that all has gone terribly wrong with these companies, there are some short- to medium-term concerns over their credit quality,” he adds.
Icra believes that in the near future, “a moderate deterioration in credit profiles of rating entities may be expected.”
The agency attributes this to three reasons: aggressive expansion plans of Indian corporations, deterioration in commodity cycles, and tightness in liquidity.
High-value acquisitions may impact cost-competitiveness of some companies, the agency says. The credit quality of those companies that are exposed to commodity cycles may get affected with the deterioration in the global economic environment.
The agency is also concerned that tightening liquidity conditions may translate into enhanced refinancing risks and higher interest rates.
Chetan Modi, India representative director of Moody’s Investor Services, is cautious in his outlook. “Although we have no blanket judgement on the credit quality of India Inc. and strictly judge credit quality on a case-to-case basis, there might be some concerns if the free cash flows for companies turn negative over a longer period of time.”