‘I don’t see infra firms active in bond market’

Global rating agency, Fitch, is bullish on India and expects more upgrades this year, which will take us back to the pre-crisis era of 2006-2008. The rating agency is also of the view there is a need for investors with different risk appetites to make the Indian corporate bond market more vibrant. Amit Tandon, managing director, Fitch
Ratings India shares his views with DNA. Excerpts:

How do you see this fiscal in terms of upgrades and downgrades?
FY08-09 was particularly challenging primarily, because what happened globally. There were certain shocks as well as the huge tightening of liquidity, certain sectors were affected. Textiles, auto ancillaries and others such as real estate, which was driven by liquidity, were affected as liquidity suddenly dried up. Last year, we saw some amount of stabilisation. That trend is continuing, so we see some improvement in the performance of companies.

We see greater ability to raise funds. So that would suggest that the ratio of downgrades to upgrades will change. Hopefully, we should have a lot more upgrades than we have had in the past. And fewer downgrades will happen due to which the ratio will improve. I think we will go back to where we were earlier in the 2006-08 period. It is speculative at this moment. But the economy is growing 8-8.5%, that itself seems to suggest that.

In which sectors do you see more upgrades and which are more prone to downgrades?
Sectors such as real estate moved down rapidly. Few slipped into defaults and similar types of bounce backs. So as the workout takes effect over a period of time, you see there is some correction. So real estate is a sector where you can see some improvement. Will it go all the way to where it was in 2008?

I doubt it. For a year or year-and-a-half lot of the funding had dried up in real estate. If you go back six to eight months, you will see that there were QIPs and equities being raised. The other thing is certain sectors, which have been cyclical. Like sugar prices last year were extremely down. I don’t know where we will end up in the second half of the year, but at the beginning of the year it was one of the sectors where you would expect some amount of improvement. It is not the kind of deterioration that happened last year.

What about the infrastructure sector?
In infrastructure, many projects are on the drawing board, many others starting to be implemented. But many projects are not getting completed as of now. So execution risks remain with those projects. When you look at all the risks in infrastructure projects, completion risks remains very high. I think we are going to live with that for some time.

What impact will the EU crisis have on the ratings of Indian firms?
I don’t think I will look at it sector-wise. It is going to be more company specific. If someone has a great deal of exports into Europe, they might see a slowdown. And of course all that adds to some amount of global uncertainty. So one would have to be more cautious. If there is a crisis in a European country, how confident are banks in terms of moving money to emerging markets. So they would say lets stick to our own market. That is something which is going to impact the flow of funds, and of course, the overall sentiment and uncertainty.
What are going to be the growth drivers in the economy?
It would be consumption and investments, particularly on the infrastructure side, where over a period of time there will be more capital moving in that direction. If the economy is growing at 8-8.5%, then companies may expand their capacity.

What are your suggestions to make the Indian corporate bond market more vibrant?
You need investors with different appetites, a diversity in investors. Someone who wants to buy short-term papers and another who wants to buy very long-term paper. The latest Deepak Parekh committee recommendation is an attempt to get the insurance sector into the bond market. So that is a small step taken in that direction.

Right now we see companies going for different tenors in bond issuances. What more can be done to boost the market?
True. But all of them are ‘AAA’ or ‘AA’ rated. You don’t have many issuers who are ‘A’ or a ‘BBB’ rated going for a bond issue. If you look at the mutual funds, they tell their investors we will put the money in ‘AAA’ or ‘AA’ rated bonds. No one is saying I will invest in ‘A’ or ‘BBB’ rated paper. Most of the issues are three-year and five-year. Longer tenors are issued, but rarely.

Which sectors are you expecting more corporate bond issuances from this fiscal?
If you look at the last few years, it has always been banks and finance companies. That trend will continue to dominate. I do not see infrastructure companies active in the bond market. You will see an occasional issue. But at the end of the day they are not good ‘AAA’ or ‘AA’ rated. Most of them will be rated at the lower end of the investment grade. That is not conducive for the bond market. Bond market is much happier with the higher rated entities.

What are the challenges you see for the banking sector?
One is the non-performing assets (NPA) which we expect to go up, because of the restructured loans. So our expectation is 20-25% of the restructured loans will eventually become NPA. But we have done some stress test and the conclusion was most banks are quite well-placed to take care of their increased NPA. Not just the NPA, but also the provisioning norms, which the Reserve Bank of India has changed. Over a period of time, capital will be a huge challenge for the sector. So banks which are able to raise capital ahead of others will be better placed to take advantage of the opportunities on offer.