Debt, be not proud
The biggest and the most credible domestic rating agency in India, CRISIL—owned by Standard & Poor’s—has sounded alarm bells for India Inc. CRISIL’s new-found concerns are two-fold. One, for the first time in five years, downgrades of companies (based on their credit profile) outnumbered the upgrades.
This comes in the wake of the multibillion dollar acquisitions that Indian business has pursued on foreign shores. The second worry is on the profitability front, with margins likely to get impacted courtesy high input costs. Add to this the sharp increase in debt in a high-interest rate regime, and a potentially bearish picture is complete.
Clearly CRISIL has its reasons for its cautious noises, which punters on Dalal Street would do well to take heed of. Even as the indices appear oblivious to these warning signals, handing out heady valuations to companies in fast-growth sunrise sectors like financial services, CRISIL feels that it’s precisely such sectors that may be treading on eggshells. The rating agency warns that a slowdown in credit growth and a high cost of deposits have the potential to derail the financial services sector’s gravy train. “The high interest rates will continue to result in higher delinquencies, especially in the retail (investors’) portfolio,” believes CRISIL.
On the whole, CRISIL says the ability of Indian companies to manage acquisitions and expansions, along with their capital structure, will be a key decider of their ratings over the medium term. Points out Roopa Kudva, Managing Director & CEO, CRISIL: “We expect credit quality to be increasingly driven by companies’ success in integrating acquired entities and managing capacity expansions.”
The big downgrades of 2007-08 includes big names like steel major Tata Steel (which had bought British steel giant Corus early in the year), and Aditya Birla’s aluminium giant Hindalco (which purchased aluminium rolling major Novelis for $6 billion in February); smaller companies like Essel Mining and India Glycols also feature on the downgrades list. In fact, six of the seven downgrades during the first half of 2007-08 were due to acquisitions or large-funded capacity expansions, thereby contributing to the sharp reversal in the hitherto improving trend of corporate India’s credit quality.
The aggressiveness of Indian companies’ growth plans is also illustrated by a study of about 70 CRISIL-rated companies with a total turnover of Rs 2.6 trillion. The study reveals that the total planned capital expenditure between fiscal 2008 and 2010 is expected to be nearly 1.4 times the aggregate net worth of the companies as on March 31, 2007. This is in comparison to a figure of 0.6 times for the fiscal 2005-07 period. Clearly, India Inc is passing through a cycle of high capital expenditure, not too different from a similar phase in the nineties. Will history—in the guise of defaults and overcapacity—repeat itself?
