Crisil issues rating alert

Written by Markets Bureau | Mumbai | Updated: Jan 16 2009, 05:41am hrs
With the stock markets still braving the shock of a global financial meltdown and the Satyam Computers scam, volumes have been halved. This has put the business of capital markets related companies under pressure. Indias leading rating agency Crisil has issued a ratings alert for these companies. Crisil will be putting the ratings of these companies under continuous surveillance.

The surveillance process ensures ongoing monitoring of all sectors, and involves frequent interactions with issuers to understand trends and track actual performance against projections.

Equity market valuations, trading volumes, and capital-raising in India have declined sharply in recent months. Crisil believes that this has business and financial implications for the capital market entities it rates. These entities are engaged in the equity broking, securities-based lending, investment banking and arbitrage trading businesses. Alongside the equity market drop, there has been a sharp fall in trading volumes, and a significant slowdown in capital-raising in the primary market.

Average daily traded value was down to Rs 54,600 crore in November 2008 from Rs 91,700 crore in January 2008. Similarly, only Rs 12,600 crore of primary-market equity was raised in the seven months through October 2008, compared with Rs 1,74,100 crore in all of 2007-08.

Consequently, players business volumes and revenues have dropped. With the economy slowing down, the prospects for capital market-related businesses are unlikely to improve in 2009, says a Crisil statement.

Additionally, most capital market entities significantly expanded their operations in 2006-07 and 2007-08, investing in branches, employees, and infrastructure, leading to an increase in their fixed operating costs.

The combination of high fixed costs and reduced business activity has resulted in a pronounced weakening in their earnings profiles. The effect of this weakening is mitigated by the sound capitalisation of many of these entities, built up through equity raised over the past three years.

All these factors create pressure onthe credit quality of capital marketentities, particularly those that have anarrow product profile, or a high andinflexible fixed-cost base. Conversely, companies with strong market positions, large capital bases and low gearing,will be better placed to withstand these pressures.

Crisil is carrying out a comprehensive assessment of the impact of the above trends on its outstanding ratings on capital market entities.

Crisil also has detailed periodic meetings with issuers to get a closer understanding of their business and financial position and strategy. Each of Crisils CreditAlerts will highlight sharp and rapid trends in a specific sector, and the likely implications of these trends on the credit quality of companies in that sector.

Under scanner

Stock markets volumes halved

Business of capital markets related companies under pressure

Equity market valuations, trading volumes, & capital-raising decline

Average daily traded value was down to Rs 54,600 crore in Nov 08

Only Rs 12,600 crore of primary-market equity was raised in the seven months through October 2008

Most capital market entities significantly expanded their operations in 2006-07 and 2007-08