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Takeways from conference call with CRISIL. We hosted a conference call with
rating heads of CRISIL. Key takeways from the call: Corporate credit quality is
worsening as highlighted by lower upgrades in 1HFY12. Pressure on profitability due to
rising rates, input costs and wages are key reasons. Demand moderation is broad
based, with a slowdown evident in 10 of the top 20 industries. Overall credit metrics
are not very worrisome, but they could potentially deteriorate at an alarming pace. For
instance, CRISIL expects interest coverage to decline to 3.5X from 4.8X, factoring a 225
bps rise in interest rates and150 bps margin decline.
Signs of weakening credit quality
CRISIL’s rating action ratio (ratio of rating upgrades to rating downgrades) increased to 1.03X in
1HFY12 from 1.1X in FY2011. The upgrade ratio declined to 4.6% in September 2012 from 6.3%
in September 2011 even as downgrades have remained steady at 2.5-3% in the recent past.
�� One of the key reasons for lower upgrades was lower profitability. Net profit margin (for about
7,000 CRISIL-rated companies) declined to 10% in September 2011 from about 13% in
September 2010. Rise in interest rates, employees wages and inputs were key drivers for the
decline in profit margin.
�� Macro demand has shown clear signs of moderation - 10 of 20 industries (in terms of loans
outstanding for Indian banks) have shown signs of slowing demand.
�� In 2009, the shock was induced by external factors and governmental action thereafter bailed
out corporate India; deterioration seems to more gradual and hence acute in this cycle. The
slowdown has also been more prolonged, underpinning CRISIL's concern.
�� Developments on the international front (and forex volatility) would be the key factors tracked
by the rating agency.
CRISIL stress test: Signs of weakening, no crises though
Assumptions: CRISIL has conducted a stress test on a sample portfolio of 5,500 rated companies.
In order to reflect the impact of recent rates hikes, the rating agency has assumed 225 bps rise in
interest rates. Other assumptions include: growth moderation of 15% from 20% and decline in
margins by 150 bps.
Output: PBT of these companies declines by about 13%. Interest coverage, on an aggregate level,
remained healthy at 3.5X as compared 4.8X in base case.
The rating agency highlighted that current liabilities across corporates have increased due to a
tighter working capital management and may not necessarily construed as higher debt levels being
camouflaged in payables.
CRISIL’s view on infra sectors
Power
The risk in the power sector (poor financials of SEBs, lack of adequate fuel etc) will likely play
out over the next 18 months. This implies that growth momentum in the sector will decline
significantly if the issues are not addressed in the interim. CRISIL’s base case (most likely
scenario) is positive. CRISIL expects State Governments to increase support to SEBs by paying
higher subsidies and expects that subsidy payout will be quicker. Tariff hikes over the past
few months are also positive for the sector.
Road
CRISIL is comfortable with the debt for road projects that are operational. FY2012E is a good
year for toll roads, traffic growth across most roads has been strong. In most cases, toll hikes
are linked to inflation; hence, the current high inflationary scenario aids tariffs hikes. The
pace of projects awarded has increased considerably over the past few months. Projects
under implementation will likely face some stress due to delays and higher costs.
CRISIL’s risk matrix for various sectors
Real Estate, sponge iron, textiles and airlines are identified as high risk sectors by CRISIL.
While the sponge iron & textiles sector is affected by an increase in raw materials driving up
working capital requirements, the increase in rates & falling demand has tempered the
financials of real estate companies; airlines are suffering from poor management and an
unfavorable tax regime on jet fuel.
Medium risk sectors include shipping, construction and cement amongst sectors.
Expansion in rating portfolio
CRISIL currently rates about 7,500 entities as compared to 500 entities three years ago. The
expansion is largely due to bank loan ratings towards the lower end of the rating spectrum.
This will likely drive sharper rating declines if the macro economy deteriorates though this
will also reflect the health of corporate India more accurately.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
Takeways from conference call with CRISIL. We hosted a conference call with
rating heads of CRISIL. Key takeways from the call: Corporate credit quality is
worsening as highlighted by lower upgrades in 1HFY12. Pressure on profitability due to
rising rates, input costs and wages are key reasons. Demand moderation is broad
based, with a slowdown evident in 10 of the top 20 industries. Overall credit metrics
are not very worrisome, but they could potentially deteriorate at an alarming pace. For
instance, CRISIL expects interest coverage to decline to 3.5X from 4.8X, factoring a 225
bps rise in interest rates and150 bps margin decline.
Signs of weakening credit quality
CRISIL’s rating action ratio (ratio of rating upgrades to rating downgrades) increased to 1.03X in
1HFY12 from 1.1X in FY2011. The upgrade ratio declined to 4.6% in September 2012 from 6.3%
in September 2011 even as downgrades have remained steady at 2.5-3% in the recent past.
�� One of the key reasons for lower upgrades was lower profitability. Net profit margin (for about
7,000 CRISIL-rated companies) declined to 10% in September 2011 from about 13% in
September 2010. Rise in interest rates, employees wages and inputs were key drivers for the
decline in profit margin.
�� Macro demand has shown clear signs of moderation - 10 of 20 industries (in terms of loans
outstanding for Indian banks) have shown signs of slowing demand.
�� In 2009, the shock was induced by external factors and governmental action thereafter bailed
out corporate India; deterioration seems to more gradual and hence acute in this cycle. The
slowdown has also been more prolonged, underpinning CRISIL's concern.
�� Developments on the international front (and forex volatility) would be the key factors tracked
by the rating agency.
CRISIL stress test: Signs of weakening, no crises though
Assumptions: CRISIL has conducted a stress test on a sample portfolio of 5,500 rated companies.
In order to reflect the impact of recent rates hikes, the rating agency has assumed 225 bps rise in
interest rates. Other assumptions include: growth moderation of 15% from 20% and decline in
margins by 150 bps.
Output: PBT of these companies declines by about 13%. Interest coverage, on an aggregate level,
remained healthy at 3.5X as compared 4.8X in base case.
The rating agency highlighted that current liabilities across corporates have increased due to a
tighter working capital management and may not necessarily construed as higher debt levels being
camouflaged in payables.
CRISIL’s view on infra sectors
Power
The risk in the power sector (poor financials of SEBs, lack of adequate fuel etc) will likely play
out over the next 18 months. This implies that growth momentum in the sector will decline
significantly if the issues are not addressed in the interim. CRISIL’s base case (most likely
scenario) is positive. CRISIL expects State Governments to increase support to SEBs by paying
higher subsidies and expects that subsidy payout will be quicker. Tariff hikes over the past
few months are also positive for the sector.
Road
CRISIL is comfortable with the debt for road projects that are operational. FY2012E is a good
year for toll roads, traffic growth across most roads has been strong. In most cases, toll hikes
are linked to inflation; hence, the current high inflationary scenario aids tariffs hikes. The
pace of projects awarded has increased considerably over the past few months. Projects
under implementation will likely face some stress due to delays and higher costs.
CRISIL’s risk matrix for various sectors
Real Estate, sponge iron, textiles and airlines are identified as high risk sectors by CRISIL.
While the sponge iron & textiles sector is affected by an increase in raw materials driving up
working capital requirements, the increase in rates & falling demand has tempered the
financials of real estate companies; airlines are suffering from poor management and an
unfavorable tax regime on jet fuel.
Medium risk sectors include shipping, construction and cement amongst sectors.
Expansion in rating portfolio
CRISIL currently rates about 7,500 entities as compared to 500 entities three years ago. The
expansion is largely due to bank loan ratings towards the lower end of the rating spectrum.
This will likely drive sharper rating declines if the macro economy deteriorates though this
will also reflect the health of corporate India more accurately.
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