Rating upgrades to help infra-related firms with better access to banks funds: study

Banks to draw comfort from increased upgrades of infrastructure related companies

The rising cost of funds due to tightening of interest rates by RBI is not expected to discourage infrastructure related companies like Power, Real-estate, and construction to have easy access to project finance from banks. The positive ratings of infrastructure related companies by CARE Ratings, demonstrate improved earnings, higher sales and better utilization of capex among others, thus enabling these companies with enough muscle power to bargain on rates.

CARE Ratings has recently upgraded some of the companies operating in the infrastructure space, e.g. Essar Projects, Unity Infraprojects, Bhander Power, Arasmeta Captive Power, GVK Gautami Power and few others. The number of companies upgraded by CARE during the period April to September 2010 stands at 99 against 9 upgrades last year. “Many of these upgrades are concentrated in the infrastructure-related industries including power, roads, ports, construction as well as engineering. CARE has also seen a decrease in the number of companies downgraded, from 66 to 46 for the same period, specifically of companies that are spread over hospitality, jewellery and certain segments of metals and chemicals, indicating that banks will be selective in extending project finance”, said Mr. Dogra, CARE Ratings.

“More over the improved rating will not only enable companies to raise funds at better rates, but will also be able to borrow with less equity commitments”, added Mr. Dogra, MD & CEO, CARE Ratings.

As the fear of subprime crisis started rising in 2008, most of the Indian banks became extra cautious in their lending behavior despite moderate liquidity in the banking system. The crisis had its own implications on various manufacturing and service based companies which were substantially dependent on the export revenues. Most of these companies ended up with rating downgrades and reduced bank limits. Though there were no significant number of downgrades in the Infrastructure sector companies compared to the rest of the industry, the overall business sentiments remained subdued which resulted in the substantial decrease in the number of new projects taken up by the corporates. The other reason for this decrease was the difficulty in tying up bank finance as the banks grew cautious and demanded higher equity commitments.

The positive outlook on ratings of infrastructure-related companies by CARE Ratings is underpinned the Government initiatives to boost infrastructure spending, among others. Further, the project implementation risk of these projects has reduced significantly with the backing of Central Government agencies like NHAI, under the Public Private Partnership (PPP) model. Moreover well-structured agreements with lenders & Engineering, Procurement & Construction (EPC) contractors help in transferring the project risk to the parties well equipped to take the specific risk. CARE has considered such qualitative factors also positively while arriving at the rating of infrastructure projects.

Further the monetary tightening stance taken by RBI to contain inflationary pressure and anchor inflationary expectations is expected to ease down as inflation appears to be stable and coming down marginally. Also the slowdown seen in industrial production that fell to a 12 month low at 7.1% in July, having grown at 11.6% in the first quarter also needs attention and fueling through ample liquidity.