One of the reasons for the rally in many beaten-down stocks is that liquidity has improved in the markets, as a result of which companies can now get refinancing on easier terms, thus improving their balance sheets. Witness, for example, the recent spate of qualified institutional placements. This also explains the rally in real estate stocks, because the balance sheets of these firms were the most affected by the lack of funding opportunities. Credit Market Academy, which aims to provide and promote information in the loan markets, says in their newsletter Credit Street that across five rating agencies during the month of April, there were three rating upgrades and 79 rating downgrades. Compare that with two upgrades in March and 61 downgrades. In February, there were four upgrades and 77 downgrades. These figures include ratings from Crisil Ltd, Icra Ltd, Credit Analysis and Research Ltd, Fitch Ratings Ltd and Brickwork Ratings India Pvt. Ltd.
Also See Lagging Indicator (Graphics)
It’s clear, therefore, that despite the recent optimism in the markets, the balance sheets of Indian companies continue to deteriorate. In April, the three upgrades relate to Housing and Urban Development Corp. Ltd, GMR Infrastructure Ltd and Shyama Power India Pvt. Ltd.
Nevertheless, it’s important to underline that rating actions are a lagging indicator, because rating agencies use historical financial data to arrive at their rating decisions. Stock markets, on the other hand, had discounted the deterioration in corporate balance sheets long ago, as seen from the stream of research reports on rising debt burdens due to the inability to convert foreign currency convertible bonds and the depreciating rupee. Now that the balance sheets of some companies are being repaired, their stocks, too, are being rerated.
Graphics by Ahmed Raza Khan / Mint
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