The Hindu Business Line : ‘Acquisitions will hurt credit-worthiness’

Growth vs. Risk
Downgrades during the first half of 2007-08 were driven largely by the increasing risk appetite of corporate managements.
Six of the seven downgrades during this period were due to acquisitions or large debt-funded capacity expansions.

Our Bureau

Mumbai, Oct. 11 Aggressive acquisitions and capacity expansions by Indian corporates will impact their credit-worthiness, said Crisil Ratings.

The rating agency said that for the first half of this fiscal, its downgrades have exceeded upgrades for the first time in five years.

The downgrades during the first half of 2007-08 were driven largely by the increasing risk appetite of corporate managements. Six of the seven downgrades during this period were due to acquisitions or large debt-funded capacity expansions. This was a reversal from the improving trend of corporate India’s credit quality, which was the case until now, Crisil said.

Downgraded majors

Among the larger corporates that were downgraded are Tata Steel, Hindalco, Tata Power, Indian Glycols and Essel Mining and Industries.

“Strong financials can support increasing leverage and rising interest costs only to a certain extent. Beyond this, aggressive acquisitions or capacity expansions will impact creditworthiness,” the report said.

The other major factors that will drive credit quality for the rest of the fiscal include successful management of growth and integration of acquired entities, and the funding pattern for acquisitions and capacity expansions.

Going ahead, corporates may also face profitability pressures on account of high input costs. This, along with high interest costs due to a sharp increase in debt, may lead to pressure on companies’ profitability margins, which in turn would impact credit quality.

Lenders’ perspective

Crisil’s modified credit ratio (MCR, the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations) for the first half of this fiscal has dropped to 0.94 times, from 1.16 times in FY05. This reflects one upgrade and seven downgrades in Crisil’s long term ratings. In FY 07 the MCR was 1.01 times.

The last time downgrades outnumbered upgrades was in FY03, when an MCR of 0.98 was recorded.

According to Mr N. Muthuraman, Director – Rating Criteria and Product Development, Crisil, “The absolute debt quantum for Indian corporates has gone up substantially and therefore the total interest cost would increase.”

While the acquisitions and expansion by Indian corporates are viewed as a positive from the equity perspective, from the lenders’ perspective it may not be a positive if the debt quantum is high, he pointed out.