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Credit rating downgrades more than upgrades in Q1

Infrastructure projects, which are more capital intensive and hence more vulnerable to interest rate changes, will be under pressure over the coming months.

B.S. Srinivasalu Reddy | July 11, 2011 | Updated 13:59 IST

Credit rating downgrades outpaced upgrades in the quarter ended June 2011, reversing the trend of the last financial year.

And in the quarters to come, sectors such as infrastructure, cement, real estate and shipping, which are raw material or capital intensive, are expected to be more vulnerable to downgrades.

The play of inflation and high interest rates, and economic slowdown may be more starkly visible in the next couple of quarters, leading rating agencies feel.

"The overall rating trend for corporates has been stable for the June quarter. The number of downgrades marginally exceeded the number of upgrades for the quarter. A common theme across some of the downgrades was the liquidity pressures being felt by entities in the BBB (ind) and below range (below investment grade)," said Atul Joshi, managing director (MD) and chief executive officer (CEO) of Fitch Ratings India.

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This was mainly "on account of inventory, receivable pressures and reduced availability of external funding from banks", Joshi added.

However, the largest corporate rating company in the country, Credit Analysis and Research Ltd (CARE), saw the share of its upgrades during the previous quarter going up to 75 per cent, from 70 per cent in 2010-11 as a whole.

"In the first quarter of this fiscal, the share of upgrades was higher at a little over 75 per cent, though admittedly, the surveillance process gains momentum after the audited results are out, which will be from now onwards," said D. R. Dogra, MD and CEO of CARE.

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Credit ratings denote the company's ability to service its debt and rating opinions are based on factors such as the performance of the company, the servicing of its debt, dealings with creditors, inventory build-up, performance of competition and corporate strategy, which have a bearing on the future ability of the company to service its debt.

CARE had handled ratings of 348 long-term rating cases and 154 short-term rating cases in 2010-11. It had upgraded 231 companies and downgraded 117 among the long-term cases, while there were 111 upgrades and 43 downgrades in short-term ratings.

This amounted to over 70 per cent share of the overall rating upgrades during the fiscal.

Currently, external factors such as inflation and interest rates have an important impact on the performance of companies as it affects overall bottomlines. However, this will vary between industries as the demand factor would also have an important role to play.

"Those industries that are raw material intensive will be affected by higher input costs and the challenge will be whether this can be passed on to the consumer or would otherwise proportionally burden profit lines. However, when demand is high and growing, then passing on costs may not be an issue," said Dogra.

Infrastructure projects, which are more capital intensive and hence more vulnerable to interest rate changes, will be under pressure as they have to keep adjusting their cash flows in such an environment.

However, in general there are also hedging strategies that are pursued by companies.

Hence, the net effect would be moderate, Dogra added.

Courtesy: Mail Today

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