Downgrades increase as margins, credit quality seen under strain

Downgrades increase as margins, credit quality seen under strain
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First Published: Fri, Oct 12 2007. 12 03 AM IST
Updated: Fri, Oct 12 2007. 12 03 AM IST
Mumbai: The increased risk appetite of Indian companies has led to large, debt-funded acquisitions and capacity expansion plans, leading to a decline in credit quality at these companies and resulting in more downgrades than upgrades for the first time in five years, says ratings firm Crisil Ltd.
Crisil said India’s increasing risk appetite will “continue to constrain credit quality over the near-term” and that profit margins of companies might also be under pressure in the medium-term.
The outlook comes just days after David Wyss, chief economist of rating agency Standard & Poor’s, pointed out that a bubble may be building up in the debt and equity markets of emerging market economies such as India. S&P is majority owner of Crisil.
Crisil said it downgraded seven companies and upgraded only one between April and September. This has brought its modified credit ratio, or the ratio of its upgrades to downgrades, to 0.94.
Companies that were downgraded include India Glycols Ltd, Indian Farmers Fertiliser Cooperative Ltd, Tata Steel Ltd, Hindalco Ltd, Essel Mining and Industries Ltd, The Tata Power Co. Ltd and Electrosteel Castings Ltd. The lone upgrade went to Soma Textiles and Industries Ltd.
“We expect credit quality to be increasingly driven by companies’ success in integrating acquired entities and managing capacity expansions, and the funding mix employed for further acquisitions and expansions,” said Roopa Kudva, Crisil’s managing director.
Abheek Barua, chief economist at HDFC Bank Ltd, however, says the modified credit ratio may not be a “lead indicator of the economy” as there is no uniform or aggregate story in the downgrades. “The rating agency perspective is rightfully cautious,” but is is not a reflection on the economy as a whole, he maintained. Although Indian companies may be “over leveraging” as the rating agencies fear, it is part of their “strategic investments” and they may be able to service the debt as needed, he added.
Others, such as R. Raja Gopal, chief investment officer of Cholamandalam Asset Management, notes that there is also a difference between equity investors and lenders. Equity investors discount future prospects of a company assuming a company’s life is perpetual, while creditors study prospects during the life of a loan, he notes.
Crisil says the increasing risk appetite of Indian companies, in sectors such as manufacturing and infrastructure, is evident in the growing number and size of acquisitions. Of acquisitions of about $50 billion (Rs2 trillion) in April-September, overseas deals accounted for about $25 billion.
On India’s financial sector, Crisil believes that profitability of banks is likely to remain under pressure as there has been a slowdown in credit growth, coupled with rising high-cost deposits. The rating agency also predicts high interest rates “will continue to result in higher delinquencies, especially in the retail portfolio.” However, the credit profiles of financial institutions themselves are likely to remain stable, Crisil says, as they are backed by adequate capitalization and continued support from government or parent firms.
Crisil forecasts the total investments by Indian firms in capacity expansion across sectors is expected to increase significantly. The total estimated investments for seven major industries—aluminium, automobiles, cement, oil and gas, petrochemical, steel and textiles—between fiscal 2007 and 2011 is expected to be Rs6.2 trillion, which is more than thrice the investments in these industries between fiscal 2002 and 2006.
Sanjiv Shankaran in New Delhi contributed to this story.
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First Published: Fri, Oct 12 2007. 12 03 AM IST