Focus on lowering debt expected to improve credit profiles of Indian companies: S&P
19 March 2014
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.
According to Standard & Poor's Ratings Services, the size of the measures taken and the ratings agency's expectation of the impact on a company's financial ratios will determine the improvement on the company's credit profile.
"Besides raising equity and selling non-core assets, Indian companies are also divesting stakes in businesses," said Standard & Poor's credit analyst Mehul Sukkawala. "In our view, the companies' main reasons for improving their financial profiles are the weak economy and high interest rates in India, which have adversely affected cash flows and debt-servicing ability. Another reason is companies are refocusing on reducing debt after years of investing significantly on rapid growth."
Standard & Poor's recently revised the outlook on its 'B+' rating on Tata Power Co. Ltd. to positive and raised the rating on Bharti Airtel Ltd. to 'BBB-' after both Indian companies started focusing on lowering debt, in addition to benefiting from favorable regulatory developments.
Tata Power announced a rights issue of Rs20 billion and a stake sale in a coal mine amounting to about $500 million. Bharti Airtel also raised $1.25 billion through equity offering last year and we believe the company would continue to take measures such as sale of stakes in subsidiaries (such as Bharti Infratel Ltd.) or non-core assets (such as tower infrastructure).
Tata Steel Ltd. has also taken steps to reduce its leverage. The company sold part of its investment in Titan Industries Ltd. shares in 2013. Tata Steel has put its Borivali land up for sale and we believe the company would take further steps to reduce leverage. The company has also deferred phase 2 of its Orissa greenfield project; we view this to be positive for free cash flow generation after the completion of phase 1, which Tata Steel expects by March 2015.
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. For example, 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 Sabiha Gokcen International 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.
Standard & Poor's also expects companies to reduce debt through positive free operating cash flows. This is because many Indian companies have significantly reduced capital expenditures and expansion plans in the current economic environment. This is especially the case for sectors that typically use high capital expenditures, such as power, metals and mining, and infrastructure.