‘Downgrade’ Becomes A Hit Word In 2012
DSIJ Intelligence / 24 Aug 2012
In 2012, the one word that was constantly in use when referring to the Indian equity markets or the economy was ‘downgrade’. In fact, it became quite a favourite with analysts, research houses, rating agencies and investment banks. Why has it been so? Is it because the economic outlook for India has taken a turn for the worse? In our opinion, it has been the case simply because there has been an absence of positive triggers in the equity markets.
Inflation, for example, continues to be a worrisome factor while rupee depreciation has become another sore point. On a global scale, quantitative easing has simply added a spurt in the prices of commodities with Brent crude again rising and hovering around USD 115 per barrel, thereby widening the rift in the balance of payments. Meanwhile, the much-awaited reformist measures for FDI in multi-brand retail and diesel deregulation have yet not been green-lit by the government. And adding to this list of woes is the shortfall in monsoon this year.
As such, the recent downgrading of Indian companies and the economy have increased so significantly that almost every day we come across some or the other news related to downgrades. In April 2012, S&P lowered the outlook of Indian economy to ‘negative’ from ‘stable’ and further warned that India may lose its investment grade rating and could be the first “fallen angel” among the BRIC nations. Further, Fitch also took a similar step and lowered the outlook for Indian economy.
Obviously, the downgrading of India economy has had a negative impact on most of the companies too. This is evident from the fact that India Inc. posted dismal June quarter numbers. In 2012, of the 30 BSE Sensex companies, approximately 24 companies (80 per cent) were downgraded by analysts and research agencies, the contributing factors being dismal performance, muted business growth, high debt and higher financial expense, forex loss, weak order books, poor management guidance, etc.
In the equity markets, such downgrades lead to negative sentiments and panic selling, thus keeping the stocks under pressure. For instance, in June 2012, HDFC was downgraded by Macquarie as they were of the view that the company’s financial statements were overstated and that the return on equity would have been lower for the housing major. Fitch had, meanwhile, downgraded the outlook of eight banks, including SBI, ICICI Bank and Bank of Baroda, as well as some financial institutions from ‘stable’ to ‘negative’. The most recent one has been Bharti Airtel after Credit Suisse downgraded the company’s rating and slashed its target price.
Even Reliance Industries has been featured on the list of downgrades with more than eight brokerages lowering their rating for the company due to decline in production and the falling gross refining margin (GRM). In April 2012, Moody’s downgraded the ratings of PSU oil & gas majors ONGC and Gail India, stating that they could not be delinked from the credit quality of the Government of India and a weaker sovereign has the potential to create a drag on ratings. In May, capital goods major L&T was downgraded by Nomura as it believed that the worsening macro condition, weak order inflow guidance and margin squeeze were the key triggers for building up the negative outlook.
Other stocks like Maruti Suzuki, Tata Steel, Tata Motors, Coal India, Mahindra & Mahindra and Hero Motocorp have also faced the wrath of the downgrades. Also, how one can forget the Canadian research firm Veritas downgrading DLF, Kingfisher Airlines, Reliance Communications and the Indiabulls group? Veritas downgraded Reliance Communications with a target price of Rs 15 per share, around 75 per cent below its trading price. The Indiabulls Group was downgraded because the company’s sole purpose, it was alleged, was to benefit select insiders.
In response, most of the companies assured investors saying that the scenario wasn’t as bleak as it was made out to be. As such, some of the stocks maintained their status with no panic reaction from the investors. However, it is time the government took measures to change the outlook of the economy from negative to positive to stop any further downgrades.
Inflation, for example, continues to be a worrisome factor while rupee depreciation has become another sore point. On a global scale, quantitative easing has simply added a spurt in the prices of commodities with Brent crude again rising and hovering around USD 115 per barrel, thereby widening the rift in the balance of payments. Meanwhile, the much-awaited reformist measures for FDI in multi-brand retail and diesel deregulation have yet not been green-lit by the government. And adding to this list of woes is the shortfall in monsoon this year.
As such, the recent downgrading of Indian companies and the economy have increased so significantly that almost every day we come across some or the other news related to downgrades. In April 2012, S&P lowered the outlook of Indian economy to ‘negative’ from ‘stable’ and further warned that India may lose its investment grade rating and could be the first “fallen angel” among the BRIC nations. Further, Fitch also took a similar step and lowered the outlook for Indian economy.
Obviously, the downgrading of India economy has had a negative impact on most of the companies too. This is evident from the fact that India Inc. posted dismal June quarter numbers. In 2012, of the 30 BSE Sensex companies, approximately 24 companies (80 per cent) were downgraded by analysts and research agencies, the contributing factors being dismal performance, muted business growth, high debt and higher financial expense, forex loss, weak order books, poor management guidance, etc.
In the equity markets, such downgrades lead to negative sentiments and panic selling, thus keeping the stocks under pressure. For instance, in June 2012, HDFC was downgraded by Macquarie as they were of the view that the company’s financial statements were overstated and that the return on equity would have been lower for the housing major. Fitch had, meanwhile, downgraded the outlook of eight banks, including SBI, ICICI Bank and Bank of Baroda, as well as some financial institutions from ‘stable’ to ‘negative’. The most recent one has been Bharti Airtel after Credit Suisse downgraded the company’s rating and slashed its target price.
Even Reliance Industries has been featured on the list of downgrades with more than eight brokerages lowering their rating for the company due to decline in production and the falling gross refining margin (GRM). In April 2012, Moody’s downgraded the ratings of PSU oil & gas majors ONGC and Gail India, stating that they could not be delinked from the credit quality of the Government of India and a weaker sovereign has the potential to create a drag on ratings. In May, capital goods major L&T was downgraded by Nomura as it believed that the worsening macro condition, weak order inflow guidance and margin squeeze were the key triggers for building up the negative outlook.
Other stocks like Maruti Suzuki, Tata Steel, Tata Motors, Coal India, Mahindra & Mahindra and Hero Motocorp have also faced the wrath of the downgrades. Also, how one can forget the Canadian research firm Veritas downgrading DLF, Kingfisher Airlines, Reliance Communications and the Indiabulls group? Veritas downgraded Reliance Communications with a target price of Rs 15 per share, around 75 per cent below its trading price. The Indiabulls Group was downgraded because the company’s sole purpose, it was alleged, was to benefit select insiders.
In response, most of the companies assured investors saying that the scenario wasn’t as bleak as it was made out to be. As such, some of the stocks maintained their status with no panic reaction from the investors. However, it is time the government took measures to change the outlook of the economy from negative to positive to stop any further downgrades.
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