India Inc may see fall in credit profiles: ICRA

NEW DELHI: In a bid to keep pace with rising investment demand fuelled by bank credit and higher funding requirements, Indian corporations may face deterioration of their credit profiles. According to a study conducted by ICRA, even as 2006 witnessed higher upgrades than downgrades, the number of upgrades have fallen sharply over the previous year. This has been attributed to scaling up of investment activities and a deterioration in the global economic environment.

The ICRA study says that a moderate deterioration in the credit profiles of corporate entities is expected because of scaling up of investment activities. “A deterioration in the global economic environment may cause some erosion in their credit metrics, especially in a scenario in which the Indian rupee strengthens and duty protection levels fall. Entities with significant short-term funding mismatches may also witness higher stress, given the expectations of tighter liquidity conditions over the short-term,” the rating agency said.

On account of aggressive expansion by corporates, the level of leveraging and project risks is likely to increase. “High-value acquisitions may also impact their cost-competitiveness and capital structures adversely,” the study said. ICRA, which is an affiliate of global rating agency Moody’s Investor Services, monitors stability and the associated default rates of the ratings it assigns. According to the study, the inverse credit ratio, which is the ratio of the upgrades to the downgrades has been falling. In 2005, for instance, there were 12 upgrades and four downgrades. In contrast, in 2006, there were six upgrades and five downgrades. Upgrades continue to outnumber downgrades, but inverse credit ratio shows deterioration, the study said.

The downgrades range across sectors including, pharmaceuticals, two-wheelers, electronics and fast-moving consumer goods, besides finance. The debt instruments of entities in the energy sector contributed the most to upgrades in 2006, while during the previous two years it was financial services sector entities that had this distinction. The agency is also concerned that tightening liquidity conditions may translate into enhanced refinancing risks and higher interest rates. Meanwhile, ICRA has announced a price band of Rs 275-330 per share for its IPO. The issue will open for subscription on March 20 and close on March 23. It will comprise 25.8 lakh equity shares constituting 25.81% of the post-offer capital.

IFCI, State Bank of India and administrator of the specified undertaking of UTI (SUTI) are making this offer of sale. IFCI and SUTI, which hold 21.13% and 7.95%, respectively, will fully-liquidate their holdings through the issue. SBI’s stake will come down to 9.99% from 11.59%. Global rating agency Moody’s Investors Service, which is a strategic partner, will get a preferential allotment at the same offer price. It will hold a stake of about 28.51% in ICRA after the IPO. The offer is being made via the 100% book building process, wherein up to 50% of the offer will be allotted to QIBs.