• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Raghuvir Srinivasan

STRANGE are the ways of rating agencies. They put a company on rating watch with negative implications, let it stay that way for almost a year and then, just when it begins to show an improvement in its operational contours, confirm the negative watch by downgrading the rating by a notch. And if you have any further doubts, they add that the outlook from now on is negative, hinting at the possibility of a further downgrade in the near future. The company in question? Tata Engineering. The rating agency? Standard & Poor's (S&P).

The rating downgrade of Tata Engineering from BB to BB- is something that S&P ought to have done at least six months ago when Tata Engineering reported a historic loss of Rs 500.34 crore and followed it up with another loss of Rs 98.90 crore for the first quarter ended June 30, 2001. If ever there was a doubt about the fundamental prospects of Tata Engineering, it was then; it certainly is not now when the company is well on the recovery path — it has announced a significant lowering of its loss — and the operating contours of the company, along with the external environment, is beginning to show just that wee bit of improvement.

Background

S&P put Tata Engineering on rating watch with negative implications in March 2001 at a time when the company was in dire straits in every conceivable manner. The rating watch seemed justified then as Tata Engineering was fighting a losing battle in the passenger car market at a time when its bread-and-butter commercial vehicle business was facing a demand recession. In fact, S&P was only underlining what was already obvious - that the future was bleak and full of potholes for the beleaguered automotive major. But yes, S&P weighed in with its opinion and for a change, it appeared in sync with the general assessment about Tata Engineering's prospects.

Current downgrade's logic

It is not unusual for rating agencies to put companies on watch but they are usually for a very short period and done when there is a developing event concerning it which could have negative implications. But it is certainly unusual for a rating agency to take all of 10 months to confirm/revise its outlook as S&P has done in this case. Besides, the downgrade has come when the company appears to be getting out of the woods.

The commercial vehicles industry is showing nascent signs of a revival; growth rates have been positive in the last four months in heavy commercial vehicles and Tata Engineering has been riding this growth curve. Its commercial vehicle sales are up 10 per cent in the quarter ended December 31, 2001 while its car sales are up 47 per cent in the same period. Aren't ratings supposed to take a view on the future? Opinions can differ but S&P's call on the commercial vehicle market, and by extension Tata Engineering's prospects, appears flawed. The company has also bolstered its net worth through a successful rights offering, which shows the confidence of the market in the company besides sending a strong positive signal to its creditors.

The "onerous debt burden" on Tata Engineering has been mentioned by S&P as a cause for the downgrade. The debt:equity ratio of the company as on March 31, 2001 was 0.92. Post-rights offering, it should be around 1.00 and this is a back-of-the-envelope calculation that does not take into account the repayments during this fiscal. Now, this is hardly "onerous" - a debt:equity ratio of 1.5 (and that's a conservative estimate) is par for the course for manufacturing entities. Tata Engineering is nowhere near the danger mark. Interest charges have been significantly brought down - it is 14 per cent lower in the first nine months of this fiscal compared to the same period last year. The company's average cost of borrowings is just 10.5 per cent and that is after considering some expensive foreign debt contracted in the past, which is now being prepaid. Borrowing costs are projected to fall below 10 per cent by June 2002. This is apart from the tight control on other costs including wages and materials.

Now, all this hardly adds up to a negative outlook for the company. S&P is unable to offer a convincing explanation in its statement announcing the downgrade. It recognises the improvement in the operating margins but it also says that the financial performance indicators remain "sub-par". What is considered as "par" will be known in 2003 when S&P says it "will look for evidence of a significant improvement in the fiscal 2003 results to resolve the outlook". The jury on S&P's action would be out till then.

Send this article to Friends by E-Mail

Stories in this Section
Cidex plans technical show in Kabul

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line