Global rating agency Moody’s said the rating of Larsen & Toubro (L&T) could be downgraded in the future due to a surge in the company’s debt. Moody’s has changed the outlook on the company’s Baa2 issuer rating, which reflects moderate credit risk, to negative from stable.
L&T’s consolidated debt has risen to Rs 18,400 crore from Rs 6,430 crore over the past two years. Moody’s, however, said, despite the economic slowdown, the engineering firm’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 two years of revenue.
L&T’s Chief Financial Officer Y M Deosthalee told Business Standard the negative outlook will not impact the company. “As part of the planned strategy, the debt has increased and any growth-oriented company will have the same issue. The company’s net debt is negative on the standalone basis,” he said.
“The consolidated debt has increased because we are developing many infrastructure projects. The situation will improve when our special purpose vehicles in the infrastructure sector start generating cash,” he added.
Negative outlook on the company has not impacted its share price, which was marginally up by 0.08 per cent and closed at Rs 1,482.20 on Thursday.
“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,” Ivan Palacios, analyst of Moody’s said in a release.
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The credit agency added that the increase in debt is evident at the company’s standalone level because of its large capital expansion programme, as well as at its infrastructure development and finance subsidiaries.
Moody’s earlier rating on L&T was taken on October 4, 2007, when it assigned the company a first-time rating of Baa2, with a stable outlook. The rating could experience downward pressure if the company’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.