CARE ratings on Wednesday lowered its rating for Hindalco’s non-convertible debentures (NCDs) worth Rs 6,000 crore to AA from AA+, citing moderation in profitability and debt protection parameters from expected levels. In July, Crisil had lowered the rating of the Aditya Birla Group company’s long-term bank loan facilities and debt programmes to AA-/stable, citing a structural shift in the cost of production and its impact on profitability.
As corporate India grapples with the continuing slowdown and balance sheets remain leveraged, the number of downgrades is increasing. FE reported recently that nearly 100 companies have been downgraded to default status between April and December. While most revisions do not signify any serious problems, the large number of downgrades for which either the rating or the outlook have been revised, reflects the weakening financials of companies; firms in the commodities space in particular have seen downgrades. Of the dozen or so metals producers that saw rating downgrades seven are steel makers, of which four are now graded to D or default rating.
More metals producers could be downgraded, say analysts, as they see several steel producers reporting negative operating cash flows in FY16. In the three months to June, every second steel producer reported a loss. At least 10 firms, with a combined market capitalisation of over R2,000 crore including Vedanta, Hindalco, and Jindal Steel and Power, have been demoted though their ratings stayed at AA, AA and AA+, respectively.
In August, when Crisil cut Vedanta’s long-term debt instruments and bank facilities rating to Crisil AA/Stable, it noted the company was likely to report a lower-than-expected consolidated Ebitda as it battled weak prices, a slow ramp-up of the aluminium smelting and power capacities and lower volumes from the iron ore business.
Consequently, Vedanta’s net debt to Ebitda, the agency said, was likely to significantly exceed its expected ratio of 2.5 times and could take longer to improve.
Companies in the infrastructure sector, whose balance sheets are stretched and who are not able to generate adequate cash flows to service their loans, are also seeing their credit profiles revised. A case in point is the Jaypee Group, which has seen debt instruments of three of its listed companies continuously downgraded since April.
While the holding company Jaipraksh Associates (JAL) carried total debt of Rs 66,761 crore on its balance sheet as of March 2015, data show that collectively, Rs 58,442crore worth of financial instruments including NCDs of JAL, Jaiprakash Power Ventures and Jaypee Infratech have been downgraded by CARE since April. The deterioration in their financial performance and the delay in monetising assets were cited by CARE as key reasons for lowering the long- and short-term bank facilities of JAL in July. Other leveraged players like GMR Infra, Punj Lloyd and Shree
Renuka Sugars have also seen their credit ratings lowered.
It’s not just Vedanta or Hindalco, several blue-chips are feeling the heat of the collapse in commodity prices and the slowdown in the economy. BHEL, Ipca Laboratories, Bank of India, Indian Overseas Bank and Bank of Maharashtra now carry a negative outlook that, according to Crisil, indicates a material likelihood — at least one in three — of the rating being downgraded over the medium term.
In late September, Crisil revised downwards the rating outlook on BHEL’s long-term bank facilities to negative from stable taking into account slow project execution and stretched working capital. Total bank facilities worth Rs 60,000 crore were rated. The agency added the rating may be downgraded if project execution continues to be slow, such that there is no meaningful improvement in profitability or if a deterioration in the receivables or sizeable debtor write-offs impact the financial metrics.