Credit profile of Indian companies getting worse

By Vipin Agnihotri

It’s official; The India Street has full evidence that the credit profile of Indian companies is getting worse. According to CRISIL, widely been regarded as the biggest and the most credible domestic rating agency in India, for the first time in five years, downgrades of Indian firms outnumbered the upgrades. Point to be noted here is that this assumption is based on their credit profile.

It is worth mentioning in this regard that this comes in the wake of the multi-billion dollar acquisitions that Indian business has pursued on foreign shores. Another concern is on the profitability front, with indications are that margins will be reduced because of high input costs.

When one adds all this with the sharp rise in debt in a high-interest rate regime, picture becomes even clearer. If experts are to be believed, even as the indices appear oblivious to these warning signs, handing out heady valuations to companies in fast-growth sunrise sectors such as financial services is recommended.

In my opinion, high cost of deposits and a slowdown in credit growth have the potential to derail the financial services sector’s gravy train. The pivotal factor here is that the high interest rates will continue to result in higher delinquencies, more so in the retail investor’s portfolio.

Over the medium term, the ratings of Indian companies will be judged on the basis of managing acquisitions and expansions along with their capital structure. The big downgrades of this year includes big name such as steel major Tata Steel and Aditya Birla’s aluminium giant Hindalco. Smaller companies such as India Glycols and Essel Mining also feature on the downgrades list.

Interestingly, most of the downgrades during the first half of 2007-08 were because of acquisitions or big funded capacity expansions, thereby contributing to the sharp reversal in the hitherto improving trend of corporate India’s credit quality.

According to sources, the total planned capital expenditure between fiscal 2008 and 2010 is expected to be around 1.4 times the aggregate net worth of the companies as on March 31, 2007.

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