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More pain awaits corporate ratings in FY13

High interest rates, commodity prices, growth slowdown continue to weigh on balance sheets, adding to the pressure

Abhijit Lele  |  Mumbai 

India Inc has pinned hopes on the Union Budget for some relief and also steps to get out of an economic slowdown in 2012-13. But rating agencies warn that the next financial year (FY13) might not bring much comfort, as the slowdown might continue. The corporate rating downgrades might remain elevated in FY13, ratings agencies said.

Ratings might remain under pressure in 2012-13, as high interest rates, inflation, a weak credit profile and demand slowdown continued to weigh on balance sheets.

While the pace of downgrade might moderate, the upgrades are not going to happen in quick time either.

According to rating agency Icra the operating environment would remain challenging. The rating volatility might remain high. This is more true in the case of lower-rated issuers.

What may continue to exert downward pressure 
* Sluggish business outlook 
* Intense competitive pressures 
* Policy-related uncertainties 
* High leveraging concerns for units in the midst of investments 
* Refinancing risks 
* Project implementation delays

Pointing to hard times, Pawan Agrawal, director-rating at Crisil said pressures would remain high for some more months in FY13. Some of the vulnerable sectors include textiles, where units are more leveraged. Another sector is iron and steel units, whose fate is linked to investment demand, which has been slow throughout 2011-12.

The aviation sector is going through a tough time and might continue to experience stress next year. Except for IndiGo Air, most airlines are facing pressure on their bottom lines. It would spread trouble to companies and firms that depend on the fate of this sector, said an analyst with a Mumbai-based rating agency.

Rajendra Mokashi, deputy managing director, CARE, said, “People are hoping against hope that the situation will get corrected. Some more pain is still in store and the government will have to ways to help the economy and business to bounce back.”

SLIDE SHOW
The rating action trends across quarters
Quarter Downgrades Upgrades *Rating change ratio
Apr-June 10 27.0 46 1.7
July-Sep  10 23 60 2.61
Oct-Dec 10 34 73 2.15
Jan-Mar 11 36 92 2.56
Apr-Jun 11 49 116 2.37
Jul-Sept 11 42 42 1.0
Oct-Dec11 78 80 1.03
* It is the ratio of upgrades to downgrades denoting pace of change in rating
Source – CARE Ratings

The rise in commodity prices would clearly hit corporate balance sheets. The spurt in global crude oil prices, especially since January, which may push the inflation up, said D Ravishankar, director at Brickworks Ratings, a Bangalore-based rating agency.

An indication is the sharp growth in non-performing assets (NPAs) of banks. “The non-performing loans (NPLs) could be upwards of three per cent by March 2013 from around 2.9 per cent in March 2012 and 2.4 per cent in March 2011,” said Geeta Chugh, credit analyst at S&P.

While admitting to adverse times in FY13, Naresh Takker, managing director and chief executive, Icra has some sobering thoughts on how things may pan out. “The sharp downward revision seen earlier may be expected to moderate in the next financial year. But rating upgrades might also not happen at rapid pace”, he added.

Some factors may work as a balm to soothen pain. For one, a shift in the Reserve Bank of India’s monetary policy stance to cut policy rate. This may lead to moderation in cost of funds.

Other factors that may soften the blow include decline in concerns over excessive incremental leveraging as a large number of companies adjust to the difficult operating environment. They have placed large investments on hold.

Greater stability in the exchange rate of the rupee, especially in the context of the sharp volatility seen in the third and fourth quarter, may ease the burden, according to an Icra analyst.

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First Published: Fri, March 16 2012. 00:15 IST
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