labels: crisil, finance - general, investment - general
Corporate India well positioned to weather any slowdownnews
27 April 2005

The credit rating of corporates in the country is stronger than ever, says a recent CRISIL report.


An analysis of CRISIL's rating trends indicates that the credit quality of CRISIL-rated corporates is stronger than it has been at any time in the recent past. This bears out the predictions made in CRISIL's October 2004 Ratings Round Up. An improvement in credit quality has been witnessed across all sectors covered by CRISIL.

The analysis also indicates a sustainable improvement in the balance sheets of CRISIL-rated companies, and predicts a continuation of strengthened credit quality over the medium term. Although high oil prices or a slowdown in global economy might lead to deceleration in growth, CRISIL expects the strong credit quality of Indian corporate to hold through the medium term.

MCR at all-time high with improving corporate credit
CRISIL's modified credit ratio (MCR) is defined as the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations. Given that CRISIL's rating portfolio encompasses all the key sectors of the Indian economy, and includes most of the top players in each segment, CRISIL's MCR is a reliable indicator of systemic credit quality trends, and a measure of underlying business fundamentals. In FY05 (April 2004 to March 2005), CRISIL's annual MCR for long-term ratings hit an all-time high of 1.16, passing the previous high of 1.06 recorded in FY95. This improvement reflects 26 upgrades and 2 downgrades in CRISIL's long-term ratings portfolio in FY05. (See table at the end)

Downgrade rate touches 10-year low
CRISIL's downgrade rate - defined as the ratio of total downgrades to outstanding ratings - reached a 10-year low of 1.32 per cent, breaching the previous low of 1.99 per cent recorded in FY95. However, in contrast to FY95 when no default was recorded, one default was observed in CRISIL's long-term ratings portfolio in FY05.

Expected improvement materialise
CRISIL's rated portfolio includes a wide range of sectors, and covers the key players in each sector. This makes the CRISIL MCR a sensitive measure of industrial performance and prospects. As predicted in the CRISIL Ratings Round-Up of October 2004, the performance of the industrial sector continues to be strong. Chart 3 below shows that the growth in the Index of Industrial Production, (general), at 8.45 per cent, scaled a 10-year high in FY05; this is in keeping with the indications available from the CRISIL MCR. This growth in IIP (general) is also reflected in improvements in MCR of all the key sectors of the economy, as will be discussed later in this document.

Historically, GDP growth has also mirrored MCR. However, in FY05, the GDP growth rate was impacted by a sharp decline in agricultural growth, which dropped to 1.1 per cent from 9.6 per cent in FY04 due to poor monsoons. This has had no significant impact on the growth of the industry and services sectors, which are more strongly linked to corporate performance, and therefore reflected in MCR trends.


Source: CRISIL Centre for Economic Research

Broad-based improvement

Key sectors of the economy - manufacturing, infrastructure and finance - recorded MCRs of more than 1 for the second consecutive year, indicating continued buoyancy. The manufacturing and finance sectors reached 7-year high MCRs of 1.13 and 1.27 respectively.

Of the 13 upgrades in the manufacturing sector, the automobile industry accounted for three, with the remainder being distributed across sectors. This underscores the broad-based improvement observed so far in manufacturing sector performance. The two downgrades in the manufacturing sector were NIIT Technologies (rating downgrade occurred subsequent to its de-merger from its parent, NIIT Ltd) and Escorts Ltd (on account of problems following a delay in realising proceeds on the sale of investments in telecom ventures - Escotel Mobile Communications and Escorts Telecom Ltd. - to Idea Cellular).

Demand driven growth in manufacturing
Key industries in the manufacturing sector have shown strong performance, driven by both consumption and investment-led domestic demand. Continued spending on road projects, a buoyant construction sector, and growth in automotive and consumer durable sectors (led by the availability of low-cost retail financing), drove demand for cement and metals. On the other hand, sectors such as pharmaceuticals and auto ancillaries, leveraging global cost competitiveness, registered impressive export performances despite the rupee's appreciation against the US dollar.

This strong demand, coupled with only modest capacity addition in the recent past, resulted in high capacity utilisation across key industries (see charts 6 and 7 below). Additionally, initiatives on cost cutting and value engineering, coupled with lower finance costs, have contributed to sustainable improvements in competitiveness across sectors. A continued global cyclical upturn in commodities, notably metals and petrochemicals also significantly boosted corporate bottomlines. CRISIL-rated corporates have used this phase of high accruals to strengthen their balance sheets, and are thus better placed to cope with incipient margin pressures, and with any future slowdown. CRISIL therefore expects sustained strong credit quality in the corporate sector.

Going forward, CRISIL believes that high oil prices and potential slowdown in global economy could play a role in muting the buoyant growth observed so far. Sustainable improvements in corporate balance sheets will, however, buttress the underlying credit quality of the rated corporate portfolio, allowing corporates to weather periods of weaker performance. CRISIL therefore expects the credit quality of its rated corporates to demonstrate steady performance going forward.

Emerging regulatory and policy clarity in infrastructure sector
The infrastructure sector saw three upgrades and no downgrades during FY05. Emerging regulatory and policy level clarity, particularly in the power and telecom sectors, has reduced uncertainties in the sector, and spurred investment. The road sector witnessed a high level of activity with some annuity projects under the NHDP programme becoming operational. Mining companies too witnessed an upturn in volumes and prices, largely driven by the growth in demand from China.

As with the corporate sector, CRISIL believes these growth trends may not sustain at the same levels going forward. For rated companies in the sector, credit quality is expected to remain stable over the short to medium term, reflecting favourable structural factors described above.

Continued improvement in operating efficiency in finance sector
With an MCR of 1.27, the financial sector showed the most pronounced upward trend among the three sectors covered in this study. Of a total of 10 financial sector upgrades, five were from the banking industry, which witnessed no downgrades. While retail loan books were burgeoning for the last few years, banks witnessed healthy corporate loan book growth during FY05. Improving economic performance and an upturn in the commodity cycle also helped reduce loan losses and provisioning requirements. However the key reason for upgrades in banking sector was CRISIL's reassessment of the central government's support available to public sector banks; this reassessment has also led to upgrades of bank subsidiaries.

CRISIL believes that in FY06, increasing efficiency of operations and the ability to pass on increased cost of funds to borrowers, will protect the earnings of its rated financial sector entities. Additionally, in CRISIL's opinion, loan loss levels will be contained as asset quality is unlikely to deteriorate. CRISIL therefore expects the current high levels of credit quality of these entities (96.2 per cent of CRISIL's financial sector ratings are 'AA' or above) to be sustained going forward.

Anticipated upturn in the investment cycle has occurred
CRISIL's Ratings Round Up of April 2004 predicted increased investments in capacity. An analysis of over 200 manufacturing and infrastructure companies in CRISIL's rated portfolio indicates that the expected corporate investment in new capacity is indeed taking place, as evident from Chart 8. This uptrend in the investment cycle is driven by

a) Growing business confidence
b) High operating rates across most industries
c) Low real interest rates - Real interest rates remained negative for the second consecutive year due to suppressed nominal interest rates
d) Increased debt-taking capacity on the back of improved profitability and restructured balance sheets (refer chart 9)


Significantly, in spite of higher capital expenditure, the debt protection measures for companies in CRISIL's portfolio are expected to remain strong (see chart 9). CRISIL therefore believes that its rated companies are at present comfortably placed to absorb the current investment spurt without stressing their capital structures.

More outlooks on 'Stable'
Rating Outlooks, assigned by CRISIL since September 2003, have proven to be leading indicators of the likely direction of rating movements. Based on the outlooks presented in the half-yearly Ratings Round-up in October 2004, a limited number of rating actions were expected in the second half of the year. This has indeed been the case with the second half of the year featuring only one upgrade and two downgrades. On the other hand, FY05 had begun with five companies having positive outlooks, all of which were upgraded during the year.

The current distribution of outlooks presented in the chart above, with no negative outlooks currently outstanding, presages high stability for CRISIL ratings over the medium term.

CRISIL's Long Term rating upgrades in FY05

Sl. No.

Company

Industry

Sector

Rating from

Outlook from

Rating to

Outlook to

1

Ashok Leyland Ltd.

Automobiles 4 wheelers

Manufacturing

AA-

Stable

AA

Stable

2

Bank of Baroda

Banks

Finance

AA+

AAA

Stable

3

Bharti Cellular Ltd.

Telecommunication-Services-Equipments/Cable

Infrastructure

AA-

Stable

AA

Stable

4

BOB Housing Finance Ltd.

Housing Finance Company

Finance

AA

Stable

AA+

Positive

5

Cadila Healthcare Ltd.

Pharmaceuticals

Manufacturing

AA

Stable

AA+

Stable

6

Canara Bank

Banks

Finance

AA+

AAA

Stable

7

Canbank Factors Ltd.

Non Banking Finance Company

Finance

AA

Stable

AA+

Stable

8

Chambal Fertilisers & Chemicals Ltd.

Fertilisers

Manufacturing

A+

Positive

AA-

Stable

9

Dhampur Sugar Mills Ltd.

Sugar

Manufacturing

D

BB

Stable

10

EID Parry (India) Ltd.

Diversified

Manufacturing

AA-

Stable

AA

Stable

11

Essel Mining and Industries Ltd.

Mining

Infrastructure

AA-

Stable

AA

Stable

12

Essel Propack Ltd.

Packaging

Manufacturing

AA

Positive

AA+

Stable

13

Finolex Industries Ltd.

Plastic & Plastic Products

Manufacturing

AA

Stable

AA+

Stable

14

IDBI Bank Ltd.

Banks

Finance

A+

AA+

Stable

15

Indian Overseas Bank

Banks

Finance

AA

Stable

AA+

Stable

16

LG Electronics India Ltd.

Consumer Durable

Manufacturing

AA

Positive

AA+

Stable

17

Mahindra and Mahindra Financial Services Ltd.

Non Banking Finance Company

Finance

AA

Stable

AA+

Stable

18

Mahindra and Mahindra Ltd.

Automobiles 4 wheelers

Manufacturing

AA

Stable

AA+

Stable

19

PNB Housing Finance Ltd.

Housing Finance Company

Finance

AA

Stable

AA+

Stable

20

Steel Authority of India Ltd.

Steel & Steel Products

Manufacturing

BBB

A

Stable

21

Sterlite Industries (India)Ltd.

Diversified

Manufacturing

AA-

AA

22

Syndicate Bank

Banks

Finance

AA

Stable

AA+

Stable

23

Tata Chemicals Ltd.

Diversified

Manufacturing

AA

Positive

AA+

Stable

24

Tata Finance Ltd.

Non Banking Finance Company

Finance

BBB

Positive

AA+

Stable

25

Tata Motors Ltd.

Automobiles 4 wheelers

Manufacturing

AA

Stable

AA+

Stable

26

Tata Power Company Ltd.

Power

Infrastructure

AA+

Stable

AAA

Stable


CRISIL's Long Term rating downgrades in FY05

Sl. No.

Company

Industry

Sector

Rating from

Outlook from

Rating to

Outlook to

1

Escorts Ltd.

Automobiles 4 wheelers

Manufacturing

C

D

2

NIIT Technologies Ltd.

Computers - Software

Manufacturing

AA+

Stable

AA-

Stable


CRISIL's Fixed deposit rating upgrades in FY05

Sl. No.

Company

Industry

Sector

Rating from

Outlook from

Rating to

Outlook to

1

Ballarpur Industries Ltd.

Paper & Paper Products

Manufacturing

FA+

Stable

FAA-

Stable

2

Canbank Factors Ltd.

Non Banking Finance Company

Finance

FAA+

Stable

FAAA

Stable

3

Chambal Fertilisers & Chemicals Ltd.

Fertilisers

Manufacturing

FAA-

Positive

FAA

Stable

4

Dhampur Sugar Mills Ltd.

Sugar

Manufacturing

FD

FB+

Stable

5

Kirloskar Brothers Ltd.

Compressors & Pumps

Manufacturing

FA+

FAA-

6

Lakshmi General Finance Ltd.

Non Banking Finance Company

Finance

FAA+

Positive

FAAA

Stable

7

Mahindra and Mahindra Financial Services Ltd.

Non Banking Finance Company

Finance

FAA

Stable

FAA+

Stable

8

PNB Housing Finance Ltd.

Housing Finance Company

Finance

FAA+

Stable

FAAA

Stable

9

State Bank of Indore

Banks

Finance

FAA

FAAA

Stable

10

Steel Authority of India Ltd.

Steel & Steel Products

Manufacturing

FA

FA+

Stable

11

Sundaram Finance Ltd.

Non Banking Finance Company

Finance

FAA+

Positive

FAAA

Stable

12

Tata Finance Ltd.

Non Banking Finance Company

Finance

FA-

Positive

FAAA

Stable


CRISIL's Fixed deposit rating downgrades in FY05

Sl. No.

Company

Industry

Sector

Rating from

Outlook from

Rating to

Outlook to

1

CentBank Home Finance Ltd.

Housing Finance Company

Finance

FAA-

FA-

2

EIH Ltd.

Hotels

Manufacturing

FAA-

Negative

FA+

Stable

also see : Credit fundamentals at all-time high: CRISIL

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Corporate India well positioned to weather any slowdown