The Hindu Business Line : ‘Some cos, sectors may face rating revision due to downturn’

Reasons for relook
Companies’ cash flows could be impacted due to factors such as high input, commodity and fuel costs
Companies having huge capex plans financed by huge debt may impact their ratings

Priya Nair

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Mumbai, July 20 With corporate India facing pressure on profitability this fiscal, certain companies and sectors may face downgrades in their credit profiles, said rating agencies.

The current downturn is characterised by high interest rates, rising fuel prices, high input and commodity costs, depreciating rupee against dollar, and credit squeeze. Therefore, companies that are vulnerable to these factors may face a revision in their ratings.

Changes in economy

Most rating agencies do factor in a possible down-turn in the industry cycle while assigning ratings. They also monitor all ratings continuously. However, sudden and unanticipated changes in the economy as well as some corporate actions are difficult to be factored in while assigning ratings. In this scenario, rating agencies will be required to have a closer watch to factor in the changing credit profiles of corporates, said Mr D.R. Dogra, Deputy Managing Director, Care Ratings.

“We are amidst various structural changes in the economy, both in the domestic as well as global markets. Indian economy is facing increasing inflationary pressures, rising fiscal deficit and widening current account deficit. When the going was good, many companies went for huge expansions both organically and inorganically. Now with unexpected slowdown in the economy, these companies may face sluggish demand,” he said.

Crisil Ratings, which saw more downgrades than upgrades in the last fiscal, expects the same this fiscal as well, said Mr Raman Uberoi, Senior Director, Crisil Ratings.

“While we continuously monitor all our standing ratings, we may re-look at those companies whose cash flows could be impacted due to factors like high input, commodity and fuel costs,” he said.

According to Mr Dogra, spurt in fuel prices, cost of borrowing, input costs and manpower costs with slow-down in demand would adversely impact companies in industries such as automobiles, consumer goods, airlines, cement, petrochemicals, infrastructure, steel, real estate, construction and textiles.

Exposure to debt

Another factor that rating agencies would consider is the corporates’ exposure to debt.

“Till one year back, companies had strengthened their balance sheets. But now global funding, debt or equity, has contracted to a certain extent. The RBI has also placed restrictions on external borrowings. This has pushed up the cost of loans and this in turn will affect the credit profile and financial profile of corporates. If companies have huge capex plans and if it financed by huge debt, their ratings may get affected,” Mr Uberoi said.

Some sectors that may see impact on profitability this fiscal are small and medium sized realty sector companies due to the high debt required to acquire land; fertiliser companies due to the issue of subsidies and auto and auto ancillary due to high input cost, he added.