Mumbai: Corporate India’s recent foreign acquisition spree may well come at a hefty price—their ability to raise more credit could be compromised.
Crisil, a credit-ratings agency, put Hindalco, India’s largest metals company, on negative ratings watch, in a clear signal that it’s $6 billion (Rs26,400 crore) acquisition of the US aluminium sheet maker, Novelis, would dent its profitability.
More relooks at credit ratings could follow because corporate India may have bitten more than it can swallow, in acquiring companies several times their size, ratings agencies said.
“Keeping a high credit rating is not the be-all and end-all of everything. It is not bad for ratings to go down,” said Crisil’s chief rating officer and executive director, Roopa Kudva.
International companies, such as Philip Morris, have said they would like to maintain an ‘A’, rather than ‘AAA’, rating, which is the highest rating.
Such an initiative would give companies the flexibility to scale up operations while maintaing investment grade.
“A re-rating is not an automatic outcome—it depends on how the benefits of the deal weigh against the higher debt burden,” said Chetan Modi, representative director, Moody’s India.
“Future plans are important—will acquisition debt be paid down quickly, or is management’s strategic priority towards further (debt-funded) acquisitions?” he said.
Corporate India has been involved in several mega acquisitions worth nearly $20 billion, since the begining of 2007.
Tata Steel acquired UK steel major Corus for $12.5 billion, Hindalco made a bid $6 billion for Novelis and Suzlon made a $1.3 billion bid for German wind turbine maker, Repower.
These deals have helped the Indian companies acquire global scale, with Hindalco and Tata Steel entering the global top five in their sector, but they have also dealt at least a three to four year hit on the companyies’ profits. This led to Hindalco stocks plunging nearly 14%, to close at Rs149 on Monday.
“Both the number of such acquisitions and their sizes have gone up sharply this year and the dependence on debt is much higher,” said Kudva. “So, since a larger debt is being taken on the balance-sheets of these companies, the ratings of these companies could be affected.”
But getting a downgrade, over the short term, may not be bad news for these companies. “These are large companies with triple A ratings and a presence in the international bond market. So, there will not be much of an impact on their ability to raise capital,” said Rakesh Valecha, director, corporate ratings, at Fitch, a credit-rating agency. “Size does seem to matter in these industries,” says Rajesh Mokashi, executive director, at CARE, a credit-ratings agency. “Cost efficiencies will come in the medium- and long-term, although there maybe a short-term hit.”