Crisil lowers India Inc's rating first time in 5 years

As an acquisitive India Inc borrows heavily to achieve step-up growth, its creditworthiness has taken a beating. For the first time in five years, the number of corporate downgrades by Crisil are in excess of upgrades. This does not mean that companies are on the road to default. What it indicates is that these companies could be in trouble if they cannot manage their acquisitions and expansions.

“The downgrades during first half of 2007-08 were driven largely by the increasing risk appetite of corporate managements. Six of the seven downgrades during the first half were due to acquisitions, or large debt-funded capacity expansions, marking a sharp reversal in the hitherto improving trend of corporate India’s credit quality,” said Crisil in a statement issued here.

It is not just the money borrowed for overseas acquisition that is putting pressure on the corporates balance sheets. Galloping input costs, coupled with high-interest costs may lead to pressure on companies’ profitability margins, in turn affecting credit quality, said Crisil. Two of the high profile downgrades during the year included the revision of Tata Steel’s rating following its $13 billion acquisition of UK-based steel company Corus and Hindalco industries after it acquired Canada’s Novelis for $3.5 billion.

Both Tata and Hindalco made the acquisitions through the leveraged buyout route. In other words, they used assets of the acquiree company as a security to raise resources for the purchase, even as it downgraded the companies. The downgrades reflect the trade-off between growing rapidly through heavy borrowing and creditworthiness.

The downgrades are typically one to two notches, and are unlikely to result in defaults immediately, since most Crisil-rated companies remain in the high investment grade. The distribution of Crisil ratings shows that the number of companies in the ‘AAA’ rating category increased significantly to 44% in FH08 from 29% in FY03. No Crisil-rated instrument has defaulted during the past 33 months. This is the longest period without defaults in more than a decade.

The manufacturing sector accounted for most of the rating actions in FH08, with one upgrade and five downgrades. Among infrastructure companies, there were two downgrades in the first half of 2007-08. The downgrades were the result of large capacity expansions. There were no upgrades or downgrades among companies in the financial sector.

The aggressiveness of Indian corporates’ 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 FY08 and FY10 is expected to be nearly 1.4 times the aggregate net worth of companies as on March 31, 2007. This is in comparison to a figure of 0.6 times for the period FY05 to FY07.