Mumbai: Rising interest rates, inflation at a 13-year high and a tightening bear grip over the stock market are hurting Indian companies, but rating agencies are in no hurry to alter their corporate credit assessments.
Most companies raised the capital they required during the stock market boom of the past few years and their profitability is not yet under threat from the turmoil, according to the credit assessors.
Fitch Ratings managing director Amit Tandon says the stock market may be in a slump now but for a company that already has raised money and has no intention of tapping investors now, “it doesn’t really matter”.
The Bombay Stock Exchange’s benchmark index, the Sensex, has lost more than 35% so far this year.
The Reserve Bank of India has raised its short-term policy rate by 75 basis points to 8.5% and the amount of cash banks need to set aside as a proportion of their deposits by 125 basis points to 8.75% to douse inflation that last month crossed double digits.
One basis point is one-hundredth of a percentage point.
Taking their cue from the central bank, commercial banks have raised the cost of borrowing for both companies and consumers, and economists have warned of gross domestic product growth slowing. But the balance sheets of most companies remain strong, cushioning them against the turmoil in the markets, say rating agency executives.
“We will monitor corporations’ capital expenditure programmes but as of now we haven’t seen any moderation (in investment plans),” said Raman Uberoi, senior director of ratings at Crisil Ltd, the Indian affliate of global rating company Standard and Poor’s.
“We don’t expect any large-scale downgrades as most of the companies we rate have strengthened their balance sheets when the markets were good,’’ he added.
However, the cost of capital for firms will go up, which could have an impact on their profitability, said Uberoi. The combined net profits of Indian firms that constitute the country’s two benchmark equity indices, the 30-stock Sensex and the 50-stock Nifty, in the three months ending in March plunged to the lowest in eight quarters.
Companies are bound to feel the heat. Naresh Takkar, managing director of rating company Icra Ltd, says recent developments in the economy have been “negative” and if these conditions persist and start affecting companies’ operations, corporate ratings would be at risk of being downgraded.
But “unless there are some specific issues related to businesses,” Icra is not initiating any immediate rating downgrades. “But yes, we are closely monitoring the situation,” says Takkar.
While they may escape downgrades, companies have little room for an improvement in their ratings, which are closely followed by investors and determine the price companies pay for raising funds. Takkar says there may be “more downgrades than upgrades.” Icra last year downgraded nine firms and raised the ratings of eight. The downgrades were mostly in the sugar, financial services and pharmaceuticals sectors.
According to Crisil, most of the ratings actions in 2007-08 were driven by events such as debt-raising to support acquisitions. Crisil sees increasing stress on credit quality but it does not believe that this will be significant enough to drive credit defaults. According to the agency, a majority of Crisil-rated companies carry high investment-grade ratings, and any downgrades typically may not be by more than one or two notches.
Manufacturing accounted for the bulk of rating actions by Crisil in fiscal 2008 with five upgrades and eight downgrades. Two infrastructure companies were downgraded in actions driven by large debt-funded capacity expansion plans.
Companies are aware of rating risks. “I don’t think credit rating agencies are going to be kind enough to Indian companies, barring steel and oil firms, where realisations are going up,” says V. Ashok, chief financial officer at Essar Shipping, Ports and Logistics Ltd.
The outlook is grim as borrowing costs rise, says Ashok. “A falling equity market does not really allow you to access any source other than debt,” he adds.