Rating agency Crisil Ltd says that with financial pressures abating, Indian companies will now start raising debt to fund capital expenditure. Companies that had stalled their capex plans during the last 15-18 months are revisiting their plans.
To be sure, the debt market was buoyant during 2009 as well, despite the slowdown. Crisil’s results for the year ended December are clear proof of this—the company registered a 14% rise in revenue over the previous year to Rs539 crore. Around 45% of its revenue accrues from ratings and another 45% from research.
But there is a difference in the nature of debt tapped last year and what is envisaged now. “Corporates have been raising debt to improve the financial profile of existing operations, viz., better capital structure and improved maturity and cost profile of debt,” said Raman Uberoi, senior director, ratings, Crisil. In other words, fresh debt raised in the last one year was used to pay off or restructure high-cost debt. Corporate balance sheets are accordingly looking healthier.
Now the same companies would need money to expand operations and grow. “Debt raising for capex could start especially from the larger and mid-sized companies,” added Uberoi.
Rating trends also indicate that the number of companies that were upgraded or whose outlook was raised to positive was more than the number of downgrades in the last couple of months. But this was largely visible in areas where demand is strong, such as financial services, metals, commodities and auto ancillaries. Downgrades were in export-oriented sectors such as textiles, gems and jewellery, and bulk drugs.
With companies wanting to raise debt to fund capital expenditure, demand for ratings should remain robust, buoying Crisil’s revenue. During 2009, the share of rating services grew to 45% of revenue from 37% in the previous year. Advisory services revenue expanded by 4 percentage points to around 13%. The ratings division’s contribution to profit expanded substantially. Crisil’s operating profit for 2009 was Rs201 crore, marginally higher than Rs187 crore in the previous year. However, improvement of operating profit margin came from the fact that staff expenses were around 2 percentage points lower than during the previous year, which included salaries of Gas Strategies Group Ltd, a company in which Crisil divested its stake in December 2008.
For now, despite the fact that the modified credit ratio, which indicates the number of upgrades and reaffirmations to that of downgrades and reaffirmations, is likely to remain below 1 in 2010, business for Crisil would remain on the upswing. With no incremental costs visible in the near term, any revenue growth would directly trickle down to improve profit.
At Rs4,900 per share, Crisil’s earning per share of Rs222 is discounted around 22 times.
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