Credit rating agency Crisil is keeping a close eye on the balance-sheets of enterprises it has rated in view of the adverse economic climate. According to Ramraj Pai, President – Ratings, currently, the business sentiment is much worse than reality. In an interview with Business Line , he said that Government action can spur business sentiment.
Excerpts:
How is the current adverse business environment influencing the way you are rating enterprises?
We have become more watchful. We are more worried about the balance-sheet of a particular company compared to its profit and loss account. A small spurt in profit or a small loss over a short period is not that worrisome.
We are looking into aspects such as: Whether a company is structured properly on the liabilities side of balance-sheet. Is there too much short-term debt on its books and if it has the refinancing tools to service its debts?
The currency has also depreciated 20 per cent in the last one year. What effect this will have on the refinancing capability of the company? These are some of the issues which have occupied our minds.
How many companies are in the upgrade and downgrade zone in your list?
Crisil’s rating action ratio ( an indicator of relative frequency of upgrades and downgrades) declined to 0.97 times in April-June quarter of 2012. It has fallen from a peak of 1.11 times in quarter ended December 2010. It will fall further to 0.90 times in the coming months, reflecting the tough times that businesses are facing.
Our mean rating is ‘BB’. Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.
How do you see the business sentiment across the board?
Sentiment is much worse than the reality. There is too much focus on the negatives and this is feeding onto itself. Confidence levels are low. If you look at newspapers these days, there are not enough positive headlines.
However, by and large, corporate India is still in reasonably good shape. For many companies topline growth is still there. Profit margins have weakened, but we do not expect it to weaken further. From a credit perspective, the top 200-300 companies are doing fairly well.
Why has the sentiment taken a beating then?
On the Government side there is only talk. We expect some action from the Government which will revive the sentiment.
Which are the areas in which you foresee action?
We are hoping that the Government will work on the infrastructure front. If you look at the infrastructure sector, companies have done a good job of actually executing the projects. Some ultra mega power projects have already been built. The problem is with supply of coal. If these issues are resolved then it will help the industry sentiment and the business.
Some 17-18 States have increased power tariffs to reflect the reality of times. Despite the difficulties that electricity distribution companies are facing, some of the seeds for right things have been sown.
How will credit rating help small and medium enterprises (SMEs)?
It (credit rating for SMEs) is a useful addition to the financial market architecture. It is good that SMEs are getting exposed to ratings. It subjects them to third party scrutiny. They can approach banks with these ratings which will help them access cheap credit and other facilities.
It adds more value than what a chartered accountant provides to an SME. Rating agencies provide a multidimensional perspective. It broadens their horizon and rates them vis-à-vis the industry.