Credit rating agency Crisil, in its detailed explanation of its ratings round-up for FY2007-08 has said large debt-funded acquisitions and capacity expansions, driven by corporate India?s increasing risk appetite, will continue to constrain credit quality over the near term.
The ability of companies to manage acquisitions and expansions, and capital structure, will be a key driver of their ratings over the medium term.
Crisil believes that the profitability margins of Indian corporates might also be under pressure in the medium term due to high input costs and increase in interest cost, which may impact credit quality.
The increasing risk appetite of Indian corporates in the manufacturing and infrastructure sectors is evident in the growing number and size of acquisitions. Of acquisitions of about $50 billion (approx Rs 2 lakh crore) in FH08, overseas deals accounted for about $25 billion (approx Rs1 lakh crore).
The total investments by Indian corporates in capacity expansion across sectors are expected to increase significantly, Crisil said. The total estimated investments for seven major industries (aluminum, automobiles, cement, oil and gas, petrochemical, steel and textiles) during the period between FY07 and FY11 is expected to be Rs 6,29,500 crore, which is more than thrice the investments in these industries during the period between FY02 and FY06.
The aggressiveness of Indian corporates? growth plans is also illustrated by a study of about 70 Crisil-rated companies with a total turnover of Rs 2.6 lakh crore. The study reveals that the total planned capital expenditure between FY08 and FY10 is expected to be nearly 1.4 times the aggregate net worth of the companies as on March 31, 2007.
This is in comparison to a figure of 0.6 times for the period FY05 to FY07. Crisil expects the capacity expansions and acquisitions to be largely debt-funded. Thus the median gearing of these companies is expected to reach 0.97 times in FY08 from 0.61 times in FY06.
The median interest coverage of these companies during FY08 is expected to reduce to 6.21 times, from 7.48 times in FY06. The median net cash accruals to total debt ratio is also expected to decline to 32% in FY08 from 37.6% in FY06.
Profitability of banks to remain under pressure
Crisil believes that a slowdown in credit growth, coupled with growing high-cost deposits, may impact the profitability of financial sector entities. The high interest rates will continue to result in higher delinquencies, especially in the retail portfolio. However, the credit profiles of financial sector entities are likely to remain stable, backed by adequate capitalisation, and continued support from government (in case of PSU banks or FIs) or parent entities.
