M&As, expansions dent corp credit quality

Roopa Kudva

There has been a reversal in the credit quality of Indian corporates in the six months to September 2007, after five years of consistently improving credit-worthiness, according to the rating agency Crisil. The downgrades have exceeded upgrades, driven by large debt-funded acquisitions and capacity expansions.

There were seven downgrades in Crisil's ratings as against only one upgrade, from April to September 2007. Six of the downgrades were due to acquisitions, or large debt-funded capacity expansions.

Roopa Kudva, managing director and chief executive officer, Crisil, said, "Indian corporates' global ambitions and intention to grow faster are driving the current phase of acquisitions and capacity expansions. Going ahead, we expect credit quality to be increasingly driven by companies' success in integrating acquired entities and managing capacity expansions, and the funding mix employed for further acquisitions and expansions."

Raman Uberoi, senior director, ratings, Crisil, said that, "Indian corporates have, over the last few years, strengthened their financial profiles on the back of sustained economic growth. However, the rising input costs and higher interest costs on account of large debt-funded acquisitions and capacity expansions may continue to add pressure on credit quality."

The increase in negative ratings indicates a possible deterioration in the credit quality of Indian corporates over the short to medium term.