Rising commodity prices, interest rates to hurt profitability

Rating agency Crisil on Wednesday said that rising trend in commodity prices and interest rates would hurt the profitability of India Inc going forward.

"Profitability of companies will be negatively impacted due to rising input prices, as the ability of companies to pass on these hikes to customers is limited. Further, higher interest rate outlook would lead to lower investment, as profitability margins will be reduced," Crisil Ratings Director Pawan Agrawal said over the conference call.

The modified credit ratio (MCR), an indicator of the relative frequency of rating upgrades and downgrades, has maintained its upward trajectory for the second year, after plummeting to a decadal low of 0.86 times in 2008-09, Crisil said.

Any further improvement in MCR may, however, be limited; this will be on account of increased pressure on profitability, given the rising trend in commodity prices and interest rates, and intensifying competition, it added.

Rising commodity prices and interest rates, especially towards the second half of 2010-11, and moderation in industrial activity led to increased profitability pressures, it said.

These pressures are expected to continue, and competition to intensify, over the medium term.

The vulnerability of corporates on this account is indicated by the proportion of negative outlooks-7.6 per cent of total outlook as on March 31, 2011, the rating agency said.

Meanwhile, it upgraded ratings of 605 companies and downgraded that of 269 companies in 2010-11 on a base of around 6,200 ratings as on March 31, 2011.

The reasons for downgrade are additional debt or delay in projects; customers not paying in time; and higher competition impacting interest cash flow.

As the previous edition of Crisil's roundup, published in October 2010, had predicted, the upgrades outnumbered downgrades in the second half of 2010-11, leading to improvement in Crisil MCR.

"Upgrades outnumbered downgrades in 2010-11, driven largely by healthy demand conditions and a favourable funding environment," Crisil Managing Director and Chief Executive Officer Roopa Kudva said.

While the upgrades were spread across rating categories, about 70 per cent of the downgrades were from the low rating categories-of BB and lower, which have historically been more vulnerable to downgrades, she said.

The rating agency, therefore, believes that India Inc's credit quality is peaking, and that the MCR may not improve further.