A step up the ladder

India’s sovereign rating upgrade has come as a positive surprise for corporate India that has been on a deleveraging drive. The equity market has cheered the Moody’s rating upgrade that came after a 13-year gap.

By placing India a notch up at Baa2, from Baa3, Global rating agency Moody’s Investors Service has changed the mood of the market, which shrugged off the negative sentiments that had driven an otherwise bullish Nifty below the 10,100-mark last week.

Analysts, across-the-board, have welcomed the rating upgrade, though with varied degrees of enthusiasm.

Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, said,  “Moody's upgrade comes as a welcome move in the wake of a slew of structural reforms in the economy which are expected to enhance the potential growth in the medium-term. In the near-term, however, given that debt limits are nearly utilised, there remains minimal room for a rally in G-sec. Further, inflows in equity markets (which will be positive rupee ) will also increase domestic liquidity and hence increase the quantum of OMO sales, which will further weigh on bonds. Notably, higher crude oil prices and the risk of fiscal slippage are already weighing on bonds.”

The rating agency noted that continued progress on economic and institutional reforms will enhance the nation’s growth potential. It expects the burden of government debt to gradually decline over the medium-term. This has come as a pleasant surprise for the markets.

Over the last few days, the equity market has been under pressure, with the benchmark Nifty-50 Index sliding down from about 10,500 to sub-10,200 points. Though domestic flows have been reasonably strong over the last 18-odd months, foreign institutional investors, who turned negative on equities in the last four months but for October, might have reduced their historical overweight to India. This sovereign upgrade may prod them to review the country allocation weight.

A critical trigger for the rating upgrade, it seems, was the bank recapitalisation plan. The twin events—rating upgrade and bank recap—analysts believe, will help many corporate houses to go for refinancing to cut high-cost debt through foreign currency loans or cheaper domestic financing.

The expectation is that the process of corporate deleveraging will gather steam over the coming months.

The impact of the process is already visible. The aggregate debt-equity ratio for BSE500 companies (ex-banks) moderated by 9 percentage points (pp) to 84 per cent in FY17 from an average of 93 per cent between FY14 and FY16.

Most deleveraging is taking place in stressed sectors like construction, textiles, real estate and telecom.

The sharpest reduction in the debt-equity ratio happened in sectors like construction (-58pp between FY17 and average of FY14-FY16) and textile

(-20pp) while telecom (28pp), realty (39pp), metals (11pp) and power (11pp) sectors continued to lever up, despite their already high debt levels.

Among the less leveraged sectors, the debt-equity ratios of capital goods (-41pp), fast moving consumer goods (-21pp) and cement (-11pp) sectors moderated the most.

Analysts say the recapitalisation of public sector banks (PSBs) should nudge this process forward, as non-performing asset (NPA) resolution in many cases requires right-sizing the debt of leveraged companies.

A recent report by rating agency Icra says early signs of a revival in some sectors like infrastructure are evident with the improvement in the financial profile of players.

It said the aggregate debt at a standalone level as of March 2017 had increased only marginally from March 2016, while at the consolidated level a 12 per cent year-on-year decline in debt from Rs 1.58 lakh crore to Rs 1.39 lakh crore was seen, primarily from stake divestment in subsidiaries/projects.

According to Shubham Jain, vice-president and sector head, corporate ratings, Icra: “While it is still early to comment whether the tough phase for infrastructure companies is over, things have certainly started improving. We have seen deleveraging and focus on execution as the drivers of this improvement. Infrastructure segments like airports and highways have been outperforming, with improved operational performance supported by healthy traffic growth in both the segments.”

A major push from the government on roads and urban infrastructure segments has helped construction companies improve their order book position.

The Icra sample of construction companies saw an improvement in order inflows over the last couple of years, with a major push coming from segments like roads, metro and urban infrastructure. The current order book positions of most construction companies stand at over three times their last reported annual revenues.

With the banks grappling with high NPAs, the banking credit to several sectors has been on a decline. This, analysts believe, will lead to increased activity in the domestic bond market. Corporate bond issuance by infrastructure players is expected to see strong traction.

Bank of America Merrill Lynch (BofA ML) said “the Moody's upgrade supports our call that risks in India's G-sec markets are overdone. We still expect policy steps to cool the risks to enable banks to cut lending rates. ‎The RBI should cut rates on December 6 to signal a lending rate cut before the busy season with inflation well under control.”

Moody’s has highlighted some key risks like the possibility of rising oil prices and an expanding fiscal deficit. But that is not to take away from the reforms undertaken by the government. “The market is obviously pleased with the upgrade as is evident from the Nifty and the Sensex rising sharply higher in Friday trades. Bond yields are also expected to fall, which will be beneficial for banks,” said Mayuresh Joshi, fund manager, Angel Broking.

“This is a positive development for India as an improved rating will help the country attract more foreign investments while its equity markets will now fall within the investment mandate of more global fund managers,” said Jimeet Modi, founder & CEO of Samco Securities.

 “Upgradation of India’s rating by Moody’s certainly brought cheers to investors but we are still in the middle of the pyramid. While upgrade does not necessarily mean an invitation to make fresh equity investments, it is an indication that the policies are in the right direction. But this pull back will prove to be short-lived as no fundamentals has changed overnight,” he said.

But such sober notes may be lost in the market exuberance over the rating upgrade.


Ashwin J Punnen