Global rating agency Moody’s on Thursday said rating of engineering firm Larsen & Toubro could be downgraded in future due to increase in debt.
The rating agency has changed the outlook on Larsen & Toubro’s Baa2 issuer rating, which reflects moderate credit risk, to negative from stable.
“The change in outlook reflects the increase in L&T’s consolidated debt, which is higher than our previous expectations as a result of the company’s rapid growth plans,” Moody’s Investors Service said in a release.
It added that this increase in debt is evident at L&T’s standalone level because of its large capital expansionprogramme as well as at its infrastructure development and finance subsidiaries.
The rating could experience downward pressure if L&T’s consolidated financial profile does not improve, it said.
“In addition, continued strong growth in the infrastructure development and finance businesses is likely to lead to a downgrade, absent further equity injections on a consolidated basis,” Moody’s said.
L&T’s consolidated debt has increased from Rs 6,430 crore to Rs 18,400 crore over the last two years.
It, however, said, despite the economic slowdown, L&T’s core construction business has done well and is likely to maintain strong cash flow generation capacity, supported by a healthy order book with around 2 years of revenue.
“Upward pressure on the rating is limited, given the negative outlook. However, the rating outlook could revert to stable if the company improves its consolidated financial profile,” it added.
The Baa2 rating continues to reflect L&T’s leading market position, diverse revenue stream, strong order backlog on hand, proven operating track record and sound liquidity position.