The Indian corporate sector’s cash flows may have improved, but its balance sheets are still under stress. That’s the conclusion that can be drawn from the data on rating actions taken by rating agencies last month.
Credit Market Academy, which aims to provide and promote information in the loan markets, says in its newsletter, Credit Street, that there were four rating upgrades in February and 47 ratings were reaffirmed, while the number of downgrades was far more, at 77.
As pointed out in Credit Street, “The large number of downgrades reflects the impact of the current economic slowdown on the credit profile of Indian companies. During the month, the downgrades were mainly related to construction, auto, engineering, metals and textiles sectors, which are among the worst-impacted in the recession.”
Companies downgraded during the month included Hindalco Industries Ltd, Sterlite Industries (India) Ltd, Vedanta Aluminium Ltd, Tata Motors Ltd, Ashok Leyland Ltd and NRB Bearings.
But ratings data is notoriously backward-looking. “While credit ratings are a critical indicator of the direction of the economy, ratings agencies typically look at the historical performance of companies while arriving at a ratings decision,” said D. Ravishankar, chief executive officer of Credit Market Services Ltd, the company behind the Credit Market Academy initiative. In other words, the saving grace is that credit ratings are a lagging indicator.
Nevertheless, with the cost of credit going up for companies as a result of the rating downgrades, that in turn will affect their investment decisions.
But although the economy may have improved a bit, a big factor affecting corporate balance sheets is the weakness of the rupee. As a note by Citigroup points out, as much as 37% of corporate credit was sourced offshore in 2008, up from 34% in 2007. As the research note puts it, “A lot was borrowed offshore...has to be repaid, and in a currency ($) that has appreciated 25% over the last year vs the rupee.”
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