Corporate India improving credit profile, says S&P

20 Mar 2014

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Indian corporates are reducing their debt through sale of equity and assets thereby improving their credit profile, according to ratings agency Standard & Poor's (S&P).

''More companies are improving their high financial leverage and boosting their credit profiles by adopting measures such as sale of equity and assets or using their free operating cash flows to reduce debt,'' Standard & Poor's Rating Services said in a releas.

More Indian companies are improving their high financial leverage and boosting their credit profiles by adopting measures such as sale of equity and assets or using their free operating cash flows to reduce debt, S&P said in its report.

"Besides raising equity and selling non-core assets, Indian companies are also divesting stakes in businesses," said Standard & Poor's credit analyst Mehul Sukkawala.

S&P said companies are forced to look for ways to reduce their debt service obligations and improve their financial profiles due mainly to the weak economy and high interest rates in India, which have adversely affected cash flows.

Also, S&P said, companies are refocusing on reducing debt after years of investing significantly on rapid growth (See: Focus on lowering debt expected to improve credit profiles of Indian companies: S&P).

S&P recently revised the outlook on Tata Power and raised the rating of Bharti Airtel after both companies started focusing on lowering debt. Another Tata Group company Tata Steel also has taken steps to reduce its leverage.

It said Tata Power's outlook was recently revised to positive and Bharti Airtel's rating was revised upwards after both companies started focusing on lowering debt. Tata Power announced a Rs2,000-crore rights issue this month and raised $500 million through a stake sale in an Indonesian coal mine last quarter.

''We believe Bharti would continue to take measures such as sale of stakes in subsidiaries (such as Bharti Infratel) or non-core assets (such as tower infrastructure),'' the report said.

Tata Steel sold part of its holding in group company Titan in 2013 and also put up land in the north-western suburb of Borivali in Mumbai for sale, the S&P report said, noting that it has deferred the second phase of a greenfield project in Odisha to focus on generating cash flow for the first phase.

Many companies in the infrastructure sector with very high leverage are also considering selling assets or stakes in subsidiaries to improve their debt-servicing ability, financial flexibility, and liquidity.

GMR Infrastructure Ltd has sold two of its road projects in 2014 and signed an agreement to sell its 40 per cent stake in the Istanbul airport. ''We believe this would enable the company, and others like it, to withstand the current weak economic environment and position well for future opportunities,'' S&P said.

Companies with high capital expenditure are also reducing debt through positive free operating cash flows. This, according to S&P, is because many Indian companies have significantly reduced capital expenditures and expansion plans in the current economic environment.

Telecom players like Bharti, Vodafone and Idea are all set to turn the corner on moderating regulatory and competitive risks, leading to better credit profiles, Standard & Poor's said in the report.

''We believe the domestic telecom industry is entering a consolidation phase, given significant regulatory changes and a considerable shift in the competitive environment,'' the report said.

The report, titled Moderating Regulatory and competitive risks are positive for India's top telecoms, is written by the agency's credit analyst Abhishek Dangra.

''The top three players - Bharti Airtel, Vodafone and Idea - are likely to strengthen their market position because smaller, weaker players are likely to find it increasingly difficult to acquire expensive spectrum and lack the scale to run profitable nationwide operations,'' it added.

''We believe that the new policies on spectrum renewal, mergers and acquisitions, and spectrum trading significantly improve regulatory risks for telecoms, the risks will still be above-average compared with those in global markets.

''This is because some ambiguities in past policies have resulted in legal disputes between the government and the telecoms, and greater clarity needs to emerge on the policies rolled out in 2014,'' Dangra said.

According to S&P, the domestic telecom industry is entering a new phase where the market leaders are likely to drive competition.

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