Profitability outlook for most sectors is positive

Pranab Kumar Choudhury, vice-chairman and group CEO of ICRA, has the longest innings as the head of an Indian rating agency. In fact, when he joined ICRA as chief executive in 1991, he was the first recruit of the country’s second-largest rating firm. Mr Choudhury began his career in the manufacturing industry before joining term-lending institution IFCI, the original promoter of ICRA. Mr Choudhary not only played an important role in ICRA, forging an alliance with international rating agency Moody’s Investors Service, but also branching out in diversified services like research and advisory. Mr Choudhury spoke on issues relating to rating agencies and the Indian economy.

With demand for ratings likely to increase on account of Basel II and mandatory rating of IPOs, how do you think rating agencies will be able to meet these challenges?

Established rating agencies like ICRA have been operating in India for more than 15 years. They have already rated significant value of debt issued by a large number of corporates across diverse sectors. As a result, ICRA has access to vast in-house research, rating experience, established rating methodologies and benchmarking data for most sectors. ICRA through its relationship with Moody’s also enjoys access to international research, credit trends and methodologies. With all this in place, scaling up of resources to meet the growing opportunities should not be an imposing challenge.

Rating agencies are diversifying into different areas. Do you think, it is a tricky terrain and what are the moral hazards involved in it?

By “tricky terrain”, you are possibly referring to any potential conflicts of interest that may arise for the rating business. It could be tricky, if agencies are not careful about avoiding conflicts of interest. Rating agencies should not only be independent and objective, but also seen to be so. We have been extremely conscious of this possibility ever since we were created, and have built institutional mechanisms to ensure appropriate management of conflicts and highest standards of corporate governance. Our group activities, which include risk management and strategy advisory, IT solutions, outsourcing services and mutual fund-related products, are independently managed under separate corporate structure, managed by their respective boards, with no sharing of analytical resources or access to confidential information. Therefore, if there are hazards, our strategy has been to completely obviate them in the first place.

Questions have been raised on the role of agencies following the subprime crisis. There is a criticism relating to their failure in identifying this crisis. Do you think that rating agencies should now review their methodologies?

Let me, first of all, clarify that reviewing and refining methodologies is an ongoing process. However, as you may be aware, in the Indian market, the subprime lending is relatively small as of now. Thus, for Indian rating agencies, this presents an opportunity to learn from the international experience and further fine-tune rating models, if required.

What has been the relevance of corporate governance ratings? How seriously has the market taken it? Has there been any impact of these ratings?

Corporate governance ratings is relatively a new product compared to other traditional rating products. Any new concept takes time to be widely accepted in the ‘market’. The initiative at the initial stage comes from the select few and then as more awareness is created, its utility is more appreciated. That is exactly what is happening now. We believe our corporate governance ratings, which endeavour to emphasise on substance over form and give particular importance to the actual conduct of corporates rather than governance structure or compliance with regulations, provide useful insights to all stakeholders. Our experience indicates that many corporates prefer a diagnostic study from us to strengthen their practices or processes rather than directly opting for a public rating. The intentions usually are to take certain positive actions internally based on the diagnostic study before going for actual corporate governance rating, in course of time.

The impact of tightening measures undertaken by RBI is being seen now with lower credit growth. What is your assessment of the growth scenario in India over the next few years? Do you foresee a relative slowdown in coming years?

We continue to remain positive on the economic and business prospects. While there may be short-term periods of temporary slowdown in some sectors either due to domestic or global factors, we believe outlook for most sectors continues to remain robust. In the medium to long term, we see no significant slowdown in the economy or that of credit growth. The growth of the Indian economy will continue to be driven by (a) consumptive desires arising as a natural corollary of income growth and (b) the investment story in India driven by infrastructure, manufacturing capacity, and services (IT, banking, insurance, logistics, telecom, healthcare, and tourism.)

Looking at corporate earnings, capacity utilisation by firms and the prospects of a slowdown in the US, what is your assessment of earnings growth of private corporates? The RBI’s business confidence survey has indicated a lower level of optimism in July this year.

As stated earlier, we believe India’s business/economic prospects continue to remain positive over the next few years. Corporate earnings have seen a considerable improvement during the last few years. As economic and business conditions remain favourable, we expect profitability outlook for most sectors to remain positive, particularly for sectors where capacity additions have not been keeping pace with the demand growth. However, there might be a dip in profitability (may not be in profits, though) in some sectors due to three factors (a) strengthening of the rupee (b) non-availability of human resources at the right cost, and (c) some dip in overseas demand, particularly the US. Otherwise, there should not be too much of a problem.

Is Moody’s looking at hiking its stake in ICRA from the current level of 28%?

We can not comment on this.