INTERNSHIP PROJECT REPORT

ON

MARKETING OF BANK LOAN RATING FOR FITCH RATINGS IN

CONSTRUCTION AND INFRASTRUCTURE SECTOR IN HYDERABAD

BY

RIA VERMA

ID No. 1011041

DONE AT

Hyderabad

Project report is submitted in partial fulfillment of the requirements of

PGDM program of IMT Hyderabad.

SUBMITTED TO

Dr. Malleswari Bondada Mr Suryanarayan Mangina

(Faculty Guide) (Company Guide)

DATE OF SUBMISSION

(31st MAY 2012)

ACKNOWLEDGEMENT:

This project is as much about the people instrumental in the making of it as much as

it is about the project itself. Hence I would like to take this opportunity to thank all

those who helped me in the successful completion of my Summer Internship

Program (SIP).

First, I would like to thank Mr. Suryanarayana Mangina, the Regional Head, Fitch

Ratings Hyderabad who is also my Company Guide. He has supported me

throughout my project with his patience and encouragement. Rewarding all my

efforts while also pushing me to achieve more, he has been a very good mentor and

a supervisor.

Then I am thankful to Mr Jitendra for helping me in all the day to day work and

guiding me in all the problems which I had put in front of him. He supported like an

elder brother. I am also thankful to Miss Soumya for being there whenever I needed

any help.

I would also like to thank Dr. Malleswari Bondada, Prof. IMT Hyderabad and my

Faculty Guide for offering me much needed advice and insight throughout my

Internship. She offered an experienced ear for my doubts, because of which I have

been able to learn a lot.

In the course of my Internship at Fitch, I have been able to learn from a lot of Senior

Officials placed in various banks and large and mid-corporate companies. My

conversations with them have only helped improve my project. Therefore, I am

thankful to all the Bankers and Issuers

The entirety of my project has been completed using the resources provided to me

by Fitch Ratings for which I am extremely grateful to the Management.

Lastly, I would like to thank my parents for supporting me through my internship

process and providing me with everything I could possibly want.

RIA VERMA

2

To Whomsoever It May Concern

31st May 2012

This is to certify that Miss Ria Verma, Enrollment No. 1011041 has worked on the

project titled “MARKETING OF BANK LOAN RATING OF FITCH RATINGS IN

CONSTRUCTION AND INFRASTRUCTURE SECTOR IN HYDERABAD” for 14

weeks at FITCH RATINGS, HYDERABAD as a part of her Internship Program.

The project is complete in all the respects. We are satisfied with the performance of

the student during the internship program.

Mr Suryanarayan Mangina

Director

3

TABLE OF CONTENTS

ACKNOWLEDGEMENT……………………………………………………………….…..2

CERTIFICATE………………………………………………………………………………3

ABSTRACT………………………………………………………………………………….5

1.1 PURPOSE OF THE PROJECT………………………………….………………….6

1.2 OBJECTIVES OF THE PROJECT…………………………………….……………6

1.3 SCOPE OF THE PROJECT…………………………………………………………7

1.4 LITERATURE REVIEW…………………………………………………………........8

1.5 METHODS OF COLLECTING DATA………………………………………….…..19

1.6 LIMITATIONS OF THE RESEARCH………………………………………...……19

1.7 FACTORS CONSIDERED………………………………………..…….................20

1.8 METHODOLOGY………………………………………….……………...…...........21

1.9 ANALYSIS OF CONSTRUCTION SECTOR………………………………..…....31

1.10 ANALYSIS OF INFRASTRUCTURE SECTOR…………………………………..35

1.11 RECOMMENDATIONS …………………………………………………..……..…38

1.12 DESIGN OF FITCH LOGO …………………………………………………….….39

1.13 COMPARISON BETWEEN CREDIT RATING AGENCIES………………...….40

1.14 DETAILS ON CREDIT PROJECT……………………………………………..….46

1.15 ANNEXURE…………………….……………………………………………...……55

1.16 REFERENCES………………………………………………………………..…….60

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ABSTRACT

The SIP started with two weeks of training in which we were enlightened about the

working of credit rating agencies. Once the Mock interviews and Mock Meetings

were successfully completed then I met a lot of Issuers and Bankers. To issuers the

purpose was to explain about Fitch ratings, Advantages of getting the rating done

from Fitch rating, followed by sending of Offer letter, followed by Agreement signing,

Collection of Information and handing over the case to Analyst Team. Main aim of

meeting the bankers was to get the list of unrated companies which we could target.

I also used to get the feedback form filled from them on the basis of which I have

done the content analysis. Then all the other credit rating agencies were visited by

me, based on which I analyzed the differences in their working. I also got to work on

a Credit analysis project where my role was just of data mining of financial

information of various companies. For the Business Development of the company I

got in touch with around 80 corporate accounts through tele-calling. I visited around

30 companies/ issuers, sent profiles to 25 companies and visited around 35 Banks.

Then analysis of Construction and Infrastructure sector is also done by me.

5

1.1 PURPOSE OF THE PROJECT:

My project on Business Development is being undertaken to increase the visibility of

Fitch Ratings in Hyderabad by targeting mid and large-corporate clients and to

create awareness among the bankers of Fitch, its research and credit ratings. The

industries assigned to me are Construction and Infrastructure.

The requirement of Bank Loan Ratings and how corporate and bankers perceive

Fitch as an External Rating Agency is being studied through the feedback which we

are collecting from them. Also, the difference between a rating done by a Financial

Analyst and that done by a Credit Rating Agency will be studied to bring out the

importance of CRAs in the financial markets.

1.2 OBJECTIVES OF THE PROJECT:

The objective of my Business Development project is to increase the visibility of Fitch

Ratings in Hyderabad using various marketing techniques, especially in the Bank

Loan Ratings segment. The Bank Loan Rating segment has become very

competitive in India with the entry of many external rating agencies. Hence the big

players have a large share in the mid and large corporate sector and trying to poach

the clients of other Credit Rating Agencies is not an easy task. However, this is what

I am attempting to design various marketing strategies that can be used to target the

large corporate who are not currently clients of Fitch Ratings.

I will be doing the financial analysis on two companies already rated by Fitch to show

the comparison between a quantitative analysis done by a Financial Analyst and that

done by a Credit Rating Agency which would be both qualitative as well as

quantitative. This would only help further my argument that a credit rating is not just

about number crunching and that an Auditor or Financial Analyst cannot do the same

job done by a Credit Rating Agency as is the belief of a lot of mid-corporate who take

a rating only due to pressure from their bankers who in turn do not believe in the

rating and urge their clients to take it only because of the mandate given by RBI

which states that any bank limit, whether fund based or non-fund based over Rs. 5

crores has to be rated on its riskiness by an external rating agency, authorized by

RBI and SEBI.

Then I will be doing a content analysis on the responses of Bankers and Issuers to

find out what the opinion on credit risk assessment is from the point of view of a

6

banker as well as that of an issuer. The entire story is not complete without both

party views. Hence, using audience content analysis, through interview method of

data collection, the various units of person and response which bring out different

patterns to the study will be analyzed.

1.3 SCOPE OF THE PROJECT:

The project is split into stages:

Stage I- Training: 27 th Feb 2012- 16 th March 2012 .

During this period, we were tutored about the BASEL II requirements which

made it necessary for Credit Rating Agencies to be formed;

A comparative study of the various rating agencies present in India and the

world over was done in order to be able to point out the advantages of Fitch

with respect to the other rating agencies.

The pre-requisites for the formation of a rating agency and the various

approvals to be got from banks and market governing bodies were also

discussed.

After the theory sessions, we were trained on public speaking as we would

have to meet with a number of clients and bankers and communicate to them

on a day to day basis. For this, mock calls, mock meetings and mock

interviews were arranged by the executives at Fitch.

Stage II-Meeting the Bankers: 19 th March 2012- 29 th April 2012

In the initial meeting I was accompanied by an executive so that I could gain

confidence and learn from the questioned posed by the bankers what their

general concerns were regarding ratings and how to tackle them.

My meetings with bankers helped me see the whole picture as the Issuers

side of the story was incomplete without the Bankers view.

Stage III-Tele-calling: 22 nd March 2012-29 th April 2012.

We were assigned a few corporate companies details in our respective

sectors.

Our job was to call these companies officials and explain them about the

product and thus fixing an appointment with them.

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My task was to visit the websites of the corporate assigned to me and using

the contact details mentioned there, send Fitch’s corporate profile to the

Finance Officials.

Calls were made to mid-corporate and large-corporate, profiles were sent to

all interested parties.

Stage IV- Meeting Issuers 30 th April 2012 – 25 th May 2012

Met the Concerned person in the company with whom appointment was fixed

prior to the visit.

Explained them everything about the Fitch Rating Process.

To complete the target, we started with cold calling also ie randomly visiting

the company without prior appointments with them.

1.4 LITERATURE REVIEW:

Credit Ratings-Meaning

Credit Rating is based on the history of borrowing and repayment as well as the

availability of assets and extent of liabilities. It provides individual and institutional

investors with information that assists them in determining whether issuers of debt

and fixed-income securities will be able to meet their obligations with respect to

those securities. Credit rating is a mechanism whereby an independent third party

makes an assessment, based on different sources of information on the credit quality

of the assessed.

Credit Rating Agency:

A Credit Rating Agency (CRA) is a company that assigns ratings for issuers of

certain types of debt obligations. They issue opinions on the creditworthiness of a

particular issuer or financial instrument. They are crucial to the functioning of

financial markets.

International Rating Agencies

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Fitch Ratings: John Knowles Fitch founded the Fitch Publishing Company in 1913.

Fitch then published financial statistics for use in the investment industry. In 1924,

Fitch introduced the AAA through D ratings which has become the basis for ratings

throughout the industry. Through a series of acquisitions and mergers, Fitch began

to develop operating subsidiaries specializing in enterprise risk management and

Fitch India came to being as one such subsidiary.

Standard & Poor’s: Henry Varnum Poor set up a publishing house that published

journals which served as the forerunner for security analysis. In 1941, Standard

Statistics which published ratings for Corporate Bonds, Sovereign Debt and

Municipal Bonds, merged with Poor’s publishing house to form Standard & Poor’s

Corporation. Standards & Poor’s has become best known by indexes such as S&P

500.

Moody’s Investors Service: John Moody and Company was a publishing company

set up in the 18th century. Their first publication “Moody’s Manual” in 1900 was a

national publication on basic statistics and general information about stocks and

bonds of various industries. By 1909, analytical information of the value of securities

was also published and John Moody decided to take the idea a step further. This led

to the formation of Moody’s Investors Services in 1914, which in the following 10

years provided ratings for nearly all Government Bond markets at that time. By 1970,

Moody’s began rating commercial papers and bank deposits, becoming the full-scale

rating agency that it is today.

Table 1-RATING SYMBOLS USED BY INTERNATIONAL RATING AGENCIES

Moody's S&P Fitch

Long-term Short-term Long-termShort-

termLong-term Short-term

9

Aaa

P-1

AAA

A-1+

AAA

F1+Aa1 AA+ AA+

Aa2 AA AA

Aa3 AA- AA-

A1 A+A-1

A+F1

A2 A A

A3P-2

A-A-2

A-F2

Baa1 BBB+ BBB+

Baa2P-3

BBBA-3

BBBF3

Baa3 BBB- BBB-

Ba1

Not prime

BB+

B

BB+

B

Ba2 BB BB

Ba3 BB- BB-

B1 B+ B+

B2 B B

B3 B- B-

Caa1 CCC+

C CCC CCaa2 CCC

Caa3 CCC-

Ca CC

C

CD /

DDD/

Source: http://en.wikipedia.org/wiki/Credit_rating

Rating Agencies in India:

Except for Fitch Ratings, all the other Rating agencies in India have been set up as

joint-ventures with the International Rating Agencies.

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CRISIL: In India, credit ratings started with the setting up of The Credit Rating

Information Services of India (now CRISIL Limited) in 1987. CRISIL was promoted

by premier financial institutions like ICICI, HDFC, UTI, SBI, LIC and Asian

Development Bank. Now CRISIL is a Standard &Poor’s company with a majority

shareholding.

ICRA: Formerly known as Investment Information and Credit Rating Agency of India

Limited, it was set up in 1991 by leading financial/investment institutions, commercial

banks and financial services companies as an independent and professional

Investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries

together form the ICRA Group of Companies (Group ICRA). ICRA Limited is a Public

Limited Company, with its shares listed on the Bombay Stock Exchange and the

National Stock Exchange. It was promoted mainly by IFCI and is now controlled by

Moody‘s.

CARE: Credit Analysis and Research Ltd. (CARE) was set up in April 1993. It was

promoted mainly by banks and Financial Institutions. The main shareholders of

CARE are- IDBI, Canara Bank and SBI. It is recognized by RBI, SEBI and the

Government of India.

Fitch Ratings: Fitch India a 100% subsidiary of Fitch International. Set up in India in

2001, it is a recognized Credit Rating Agency with RBI, SEBI and NHB.

ONICRA: Mr.Sonu L Mirchandani founded ONICRA in 1993. It is today an active

player in the Credit and Performance Assessment space, providing rating services to

individuals, corporate and MSMEs.

Brickworks: Brickwork Ratings is a Bangalore-based company incorporated in 2007

with the mission of providing unbiased information to Indian investors for making

better investment decisions. It is a SEBI licensed credit rating agency, founded by

bankers, credit rating professionals, former regulators as well as professors, is

committed to promoting Financial Literacy.

SMERA: SMERA is the country's first Rating agency that focuses primarily on the

Indian Micro, Small and Medium Enterprise (MSME) segment. It is a joint initiative by

SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B) and

several leading banks in the country.

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BASEL II NORMS:

The entire practice of Credit Rating Agencies today, stands on the three pillars of

BASEL II Norms. Basel II is a revised framework on Capital Adequacy by the Basel

Committee on the Banking and Supervision. Under this system assets on the

balance sheet, together with non-funded commitments and other similar exposures,

are assigned prescribed risk weights. Banks must maintain minimum capital funds

equal to a prescribed ratio of the aggregate risk weighted assets and exposures.

With a view to maintaining consistency and harmony with international standards,

RBI has decided that all commercial banks in India will adopt the Standardized

Approach for measuring credit risk under Basel II.

As per Basel II norms, external ratings may be applied in order to determine the

amount of capital required for all of a bank’s current exposures/claims (both funded

and non-funded) relating to the credit risk to which they are exposed.

RBI guidelines on Basel II norms require the banks, where they use external ratings,

to use recognized agencies such as Fitch Ratings to support the measurement of

credit risk. The ratings applied for this purpose in India need to be solicited by the

borrower.

Where a bank opts not to apply external ratings for an exposure to a borrower, it has

been prescribed that all fresh sanctions and renewals of unrated exposures in

excess of Rs.50 crore will attract a risk weighting of 150% from March 31, 2008 and

a similar risk weighting for all unrated exposures in excess of Rs.10 crore from

March 31, 2009. This means increased capital costs will apply to banks for many

entities which do not have their bank loans rated. In turn, this may lead to higher

borrowing costs, if these capital costs are passed on to the borrowers.

As per the BASEL II Accord, all Credit Rating Agencies rate debt instruments and

based on their rating, banks set aside the corresponding amount of capital. The

capital adequacy associated with each risk class is given below.

Table 2-LONG TERM RATING SYMBOLS USED BY FITCH RATINGS

LONG-TERM RATINGS SYMBOLS RISK WEIGHTS

AAA (ind) 20%

AA (ind) 30%

12

A (ind) 50%

BBB (ind) 100%

BB (ind) & below 150%

Unrated* 100%

* Loans up to Rs.50 crores attract 100% risk weight whereas; those above Rs.50

crores attract 150%.

An illustration showing the benefits to banks in implementing BASEL II in comparison

to BASEL I Standards is given below.

Capital Saving Potential for a Bank on a loan of Rs.100 crores using BASELII

(Standardized Approach for credit risk)

As per BASEL I, keeping the capital gearing to be 9% for all risk classes, the capital

required to be set aside for Rs.1000 crores is Rs.90 crores.

Table 3-CAPITAL REQUIRED AS PER BASEL I NORMS

  AS PER BASEL I NORMS

RATING RISK WEIGHT

CAPITAL REQUIRED*

(Rs. in crores)

AAA 100% 90

AA 100% 90

13

A 100% 90

BBB 100% 90

BB and below 100% 90

Unrated 100% 90

As per BASEL II Norms, different risk classes attract different capital adequacy by

banks. Hence, the capital saving potential of banks by adopting BASEL II can be

seen below.

Table 4-CAPITAL SAVING POTENTIAL AS PER BASEL II NORMS

  BASEL II (Standardized Approach for credit Risk)  

RATING

RISK

WEIGHT

CAPITAL

REQUIRED*

CAPITAL SAVED (Rs. in

lakhs)

CAPITAL SAVED

(in %) **

AAA 20% 18 72 300

AA 30% 27 63 133.33

A 50% 45 45 0

BBB 100% 90 0 -100

BB and below 150% 135 -45 -243

Unrated 100% 90 0 -100

* Capital required=loan amount x risk weight x 9%

** Capital Saved (in %) = (C1-C0)/C0*100;

Where: C0Capital Required

C1Capital Saved

Using the formulae mentioned above, the amount of capital that can be saved by

banks on adoption of BASEL II norms for a loan of Rs.1000 crores has been

14

calculated and tabulated. This capital saving potential if utilized by all banks helps

increase the money multiplier function in the economy, thereby leading to more

funds being pumped into the financial system in the form of investment

Source:http://www.fitchindia.com/BLR_India_FINAL_low_res_Dec08.pdf

Table- 5 Long – Term Credit Ratings

Rating Scales Definitions

Fitch AAA Instruments with this rating are considered to have the highest degree of safety

regarding timely servicing of financial obligations. Such instruments carry lowest

credit risk.

Fitch AA Instruments with this rating are considered to have high degree of safety

regarding timely servicing of financial obligations. Such instruments carry very

low credit risk.

Fitch A Instruments with this rating are considered to have adequate degree of safety

regarding timely servicing of financial obligations. Such instruments carry low

credit risk.

Fitch BBB Instruments with this rating are considered to have moderate degree of safety

regarding timely servicing of financial obligations. Such instruments carry low

credit risk.

Fitch BB Instruments with this rating are considered to have moderate risk of default

regarding timely servicing of financial obligations.

Fitch B Instruments with this rating are considered to have high risk of default regarding

timely servicing of financial obligations.

Fitch C Instruments with this rating are considered to have very high risk of default

regarding timely servicing of financial obligations.

Fitch D Instruments with this rating are in default or are expected to be in default soon.

Table-6 Short-Term Credit Ratings

Rating Scales Definitions

Fitch A1 Instruments with this rating are considered to have very strong

degree of safety regarding timely payment of financial obligations.

Such instruments carry lowest credit risk.

Fitch A2 Instruments with this rating are considered to have strong degree of

safety regarding timely payment of financial obligations. Such

15

instruments carry low credit risk.

Fitch A3 Instruments with this rating are considered to have minimal degree

of safety regarding timely payment of financial obligations. Such

instruments carry higher credit risk as compared to instruments

rated in the two higher categories.

Fitch A4 Instruments with this rating are considered to have minimal degree

of safety regarding timely payments of financial obligations. Such

instruments carry very high credit risk and are susceptible to

default.

Fitch D Instruments with this rating are in default or expected to be in

default on maturity.

** Fitch Ratings may apply “+” sign for ratings from “Fitch A1 to Fitch A4 to reflect

comparative standing within the category”.

SOURCE: FITCH BROCHURE

The Demand for and Supply of Credit Ratings:

Issuers of securities seek credit ratings to improve the marketability or of their

securities, or to satisfy investors, lenders, or counterparties who want to enhance

management responsibility.

The Cost and Benefits of obtaining a rating:

The primary purpose of obtaining a rating is to enhance access to private capital

markets and lower debt issuance and interest costs. Credit rating agencies, in their

role as information gatherers and processors, can reduce a firm's capital costs by

certifying its value in a market, thus solving or reducing the informative asymmetries

between purchasers and issuers.

Criticisms against Credit Rating Agencies:

Credit rating agencies (CRAs) play a key role in financial markets by helping to

reduce the informative asymmetry between lenders and investors, on one side, and

16

issuers on the other side, about the creditworthiness of companies or countries.

CRAs' role has expanded with financial globalization and has received an additional

boost from Basel II which incorporates the ratings of CRAs into the rules for setting

weights for credit risk. Ratings tend to be sticky, lagging markets, and overreact

when they do change. This overreaction may have aggravated financial crises in the

recent past, contributing to financial instability and cross-country contagion.

The recent bankruptcies of Enron, WorldCom, and Parmalat have prompted

legislative scrutiny of the agencies. Criticism has been especially directed towards

the high degree of concentration of the industry. Promotion of competition may

require policy action at national and international level to encourage the

establishment of new agencies and to channel business generated by new

regulatory requirements in their direction.

Accuracy and performance of ratings:

CRAs’ failure to predict the Mexican and Asian financial crises was due, among

other things, to the fact that contingent liability and international liquidity

considerations had not been taken into account by CRAs.

In making their ratings, CRAs analyze public and non-public financial and accounting

data as well as information about economic and political factors that may affect the

ability and willingness of a government or firms to meet their obligations in a timely

manner. However, CRAs lack transparency and do not provide clear information

about their methodologies.

FITCH’S BANK LOAN RATING PROCESS

17

Initiate Rating

Process

Perform pre-analysis &

request non-public

information, ifappropriate

Collect publicly

availableinformation

Prepare detailed

questionnaire

The above mentioned Rating process typically takes 6 to 8 weeks.

Source: FITCH BROCHURE

1.5 METHODS OF COLLECTING DATA AND THEIR SOURCES:

Data collection for this Business development project was done mainly through the

bank channel. Banks were approached and the industry outlook for 2012 was

presented to them and we also gave the introduction of Fitch India and its

products/offerings to them. The unrated lists of the companies were given to us by

the banks. These bankers also served as the respondents to my survey on the

18

Hold meeting with entity

management & other

stakeholders

Hold Ratings

Committee

Draft Report

Perform in-depth

analysis

Assign Ratings, write

& publish commentary

Conduct ongoing

surveillance

reasons why a corporate approaches an external rating agency for a rating of their

debt instruments and their feedback on how Fitch India is doing as compared to its

competitors.

Primary data was collected from bankers through interview method and it was used

to do a content analysis on the requirement of an external rating agency to rate

financial instruments. Using interview method, issuers’ responses were also

recorded and an analysis of the various reasons why they take ratings for their debt

was found.

The analysis to prove the requirement of a rating agency instead of a third party

Financial Analyst was done using secondary data which were taken from published

sources like the company website, Economic Times website, newspapers, journals

and Fitch research papers.

1.6 LIMITATIONS OF THE RESEARCH -:

Following were the various limitations-:

Company officials and Bankers did not have much time to answer questions

that form a significant part of the project.

The benefits from our visits to all the nationalized banks in the city in the form

of leads generated by the said banks would arise in due course and by that

time we all will leave the company as our training will be over.

The data collected to show the need for an external rating agency to do the

rating is limited to what is available on public domains which are generally

quantitative data hence a qualitative study is bit difficult.

The content analysis conducted on the responses collected is not exhaustive.

1.7 FACTORS CONSIDERED:

Following were the factors considered for Business Development of Fitch in

Hyderabad -:

a) First of all to enquire whether the company is rated by any other rating

agency.

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b) Then enquiring about the bank loan and to check if it is above Rs.5 crore.

c) If they are an existing client of another Credit Rating Agency and asking if

they are willing to shift to Fitch at the time of annual surveillance.

d) Is the company planning any IPO in the near future

e) Are they willing to pay the fees for subscription to the rating

f) Does the company require foreign investment?-because Fitch’s international

presence helps corporate get foreign investment at lower rates.

The factors considered for Financial Analysis to show the requirement of an External

Rating Agency in obtaining a rating by a corporate were:

a) The corporate should be already rated by Fitch in order to allow comparison.

b) The financials of the company should be easily available from secondary

sources.

c) The corporate should have financials dating back at least five years for

comparison purposes.

d) All items of relevance like EBIDTA values, Non-cash Charges, Depreciation,

Profit after Tax, etc. should be given in the Profit and Loss and Balance Sheet

statements.

1.8 METHODOLOGY:

Business Development was done using various techniques like tele-calling,

sending corporate profiles, meeting with financial heads or senior financial officials to

explain them the benefits of obtaining a rating from Fitch, presenting them with an

industry outlook and a checklist of what is required in order for the rating to be

completed successfully. It is also done to negotiate the terms of rating like:

Time taken to do the rating; which is normally 4-5 weeks;

20

Fees to be paid for the rating depend on the size of the loan but it can be

negotiated.

Full and truthful disclosure of the documents is required from the company

that wishes to get the rating. These documents include the financials-current

and projected, management track record, third party information, etc which

will be considered and audited thoroughly before the analytical team take

over.

Once the client is satisfied on the above terms, the company will send him an offer

letter and sign the mandate/agreement. By signing on that, the Business

development team is discharged of their obligations and the analytical team takes

over and thus my involvement in the process is over.

A consolidated report of the companies called, number of meetings attended and

leads generated by me till date have been given below-

The calls made to various corporate were done from a self made database compiled

from the competitors list of clients, unrated lists of companies given by banks and

financial advisory corporate.

The bankers met by me were mostly Branch Managers, Assistant General Managers

and Relationship Managers. Their responses formed the other side of the coin while

analyzing how credit ratings were viewed by bankers and issuers. Given below is a

consolidated report of the number of bankers met and the method of creating a

visibility for Fitch with them was done by handing over a CD containing industry

outlook for all sectors which contained a forecast for that particular industry for the

rest of the year and the Brochure of Fitch India. This was given in both hard and soft

copy formats to the credit and risk department in each of the nationalized banks

visited. In turn, the bankers gave their views on credit ratings and Fitch’s ratings in

21

ISSUER CALL REPORT

No: not interested 30

Co. with other rating agencies 55

No: with debt below Rs.5 cr. 10

TOTAL CALLS MADE 95

particular. Some bankers even gave us the unrated list of companies with them

which formed part of the leads generated by us.

CONSOLIDATED BANKERS MEETING REPORT

Bankers met 35

Fitch Corporate CDs Distributed 32

Fitch brochure Distributed 29

CONSOLIDATED LEADS GENERATED REPORT

 

Unrated List from Bankers 20

Leads generated from my database 8

Total leads generated 28

The reason behind the comparison was because many mid corporate felt that the job

of an external rating agency which took 4-5 weeks could be done by a financial

analyst in a matter of hours or a couple of days. My comparison shows that the

quality of the two credit measurements vary vastly and no doubt remains that the

qualitative analysis done by a credit rating agency is done with a better judgment of

the business and the industry in which the business is run.

Given below is a list of issuer meetings that materialized from the tele-calling and

profile sending stage. These senior officials placed in their respective mid and large

corporate were instrumental in my analysis through their responses.

S.No.

NAME OF THE

COMPANY

CONTACT

PERSON DESIGNATION VISITS

1 IJM (India) Infra Ltd

Mr. K

Venkateswara

Rao

Snr Manager-

Corporate

Finance 1

2

Sagi Sol Technology

Services Ltd.

Mr. Yeshwanth

Vepachadu

Vice President-

Business1

3

SIBY Mining & Infra Pvt

Ltd.

Mr. Siby M

LukoseMD 1

22

4Pyramid Softsol Pvt Ltd

Mr. Kishore

Nagalla

HR & Admin.

Manager1

5 Deepija Telecom Pvt Ltd Mr. Md Kaleem HR Manager 1

6 Ramboll India Pvt. Ltd. Mr Sreedhar

Reddy

Finance Manager 1

7 Hitech Telematix India

Pvt Ltd

Mr. Srinivas

RajuMD 1

8Visu International Ltd Mr. Sreedhar

Accounts

Manager1

9 PES Engineer Ltd Mr. Vijay Kumar GM 1

10 Ramky Infra Ltd Mr. Sreehari DGM 1

11Vijay Electricals Ltd

Mr. Sreedhar

RaoFinance Manager 1

12 Edelweiss Ms M Prasanna

Lakshmi

Exec Admin &

Estates

1

13 Pranav Construction

Systems Pvt Ltd

Mr Vijay

Gadipelli

Sales Coordinator 1

14 Alengers Medical

Systems Pvt Ltd

Mr Elia 1

15 Sujana Grp Of

Companies

Mr S Sambasiva

Rao

AGM Corp

Finance

1

16 Subhagruha Projects

India pvt ltd

Mr Prasad 1

17 Alexandria Ms Ganga Devi Consultant 1

18 SREI Equipment Finance

Pvt Ltd

Mr M Damodar

Reddy

Manager(Account

s & Admin)

1

19

Krebs Biochemicals &

Industries Ltd

Mr

Satyanarayana

Kumar 1

20 PLR Infra Prjcts Ltd Mr

Laxminarayana

Manager-

Accounts

1

21 Enersies Astra Pvt Ltd Mr Tinku Punjabi Dpty Manager- 1

23

Finance

22 Imery’s Ceramic India Ltd Mr. V.V. Sairam

Manager-Fin. &

Accts. 1

23

Parsavnath Developers

Ltd.

Mr. K.

Dhananjaya

Secretary to VP

(South) 1

24

TATA Advanced Systems

Limited Mr AVS Prasad CFO 1

25

Central Power

Distribution Co. Of AP Mr Puroshotam GM 1

26

Sri Surya Educational

Society

Mr

Ramachandra

Accounts

Manager 1

27 Andhra Polymers Pvt Ltd P Sai Sreenivas PA to MD 1

28 7 Seas Entertainment ltd BS Venu Mallik Finance Manager 1

29 Amira Foods ltd

Praveen

Nagamalla GM – Mkt Devt 1

TOTAL MEETINGS WITH ISSUERS 29

The method of working of a credit rating agency though long, is thorough and almost

accurate in comparison to that of a financial analyst.

A sample of the feedback given by Bankers and Issuers to my questions of why

corporate obtains ratings and their views on credit ratings is given below.

NAME OF

BANKER/ISSUERDESIGNATION RESPONSES

Mr. K Raghunath

Associate Client Mgmt-

Global Banking, HSBC

Bank

Only nationalized banks follow

RBI norms and urge their

customers to get ratings on

their loans. HSBC does not

encourage

Mrs. NirmalaBranch manager,

Central Bank of India

BLRs r just starting to mean

something to the corporate.

24

Although it’s not being done

seriously by the CRAs.

Mr. Y subba raoChief Manager-Credit,

Andhra Bank.

Fitch gives good ratings only to

govt companies.

Mr. Mr Giriya Naik. BChief manager, State

Bank Of Mysore

Corporate take ratings only due

to RBI regulations. SMEs will

decide to get their loans rated

only if penalty is imposed.

Feels CRISIL has a better

research team.

Mr. K. Muruganandan AGM, Bank Of India

Will take time for corporate and

investors to regain trust in

ratings after the financial

meltdown.

Mr. PradhanAdvances Manager,

SBH

The general opinion of

corporate about CRAs is that

they do not try to understand

their business before giving a

rating. Hence the rating is not

really a performance measure.

It’s the result of a quantitative

analysis alone which can be

done even by a CA.

Mr. Yeshwanth

Vepachadu

Vice President-

Business, Sagi Sol

Technology Services

Ltd.

Have never heard of any

CRAs. Fitch is the 1st. If I take

a rating, it would be for the

interest rate benefit.

Mr Puroshotam GM-Central Power

Distribution Co. Of AP

Banks requires a rating for the

loan since its above 10 crore.

We also do project finance for

which high credit limits r reqd.

hence require rating.Is with

25

ICRA and is satisfied with their

rating methodology.

Mr. Srinivas RajuMD, Hitech Telematix

India Pvt Ltd

Require a quick assessment as

banks r pressurizing for a

rating. Though Fitch was not

recommended by banker.

Mr. Praveen

Nagamalla

GM – Mkt Devt, Amira

Foods ltd

Require rating because a good

rating will help get

clients/customers/suppliers

easily when we commence

operations.

Mr. AVS Prasad

CFO, TATA Advanced

Systems Limited

Taking this rating only because

of bank norms. Was with

CRISIL earlier. Didn't get a

good rating hence decided to

try Fitch.

Mr. Md KaleemManager, Deepija

Telecom Pvt Ltd

Wanted to learn more about

credit ratings. Do not have a

loan above 5 cr. Presently but

will require soon due to

expansion plans.

Mr. Nagbhushan CFO, KLR Industries

Is with ICRA. Find fees high,

rating takes a long time but find

Fitch’s ratings trustworthy. Will

take next time from Fitch.

Mr. K Venkateswara

Rao

Snr Manager- Corporate

Finance, IJM (India)

Infra Ltd

Co. having a loan but as of now

they are into huge losses, will

get the rating done once the

performance improves

The list of Companies to which Fitch Profile was sent

Sno. Company Name Person Designation

26

1 Novo Agritech Ltd J raghunath rao Chairman

2 Naidu Motors Ajay Naidu CMD

3 Nano Bud Technologies rajanikanth MD

4 Kavya Projects Pvt Ltd Prathap Kumar GM

5 Misk Technologies Pvt Ltd Mohd Ekram Ali CEO

6 Karan Woo-Sin Ltd Anil Agarwal Director

7 KSK Energy Ventures Ltd Mr Srikanth Kishore

Exec. Finance

manager

8 Phoenix Infratech Pvt Ltd Mr Suresh Chairman

9 Vision Ventures Ltd Mr G China Babu GM

10 Object Technologies Solutions

Ltd

Raju Bollu Director

11 Novu Agritech ltd Ragunath Rao Chairman

12 Lahari Power & steels Ltd K Satyanarayan Director

13 OM Shiva Shakti Iron Industries Jitender Kumar Kedia

MD

14 Gowra Petrochem Pvt ltd Gowra Srinivas MD

15 Pragati Green Meadows & resorts pvt Ltd

GBK Rao Chairman

16 IVY comptech Pvt ltd Anil Kumar

27

17 Panacea Medical Technologies Pvt Ltd

Mr Raman Director

18 Sree Lakshmi Metal Industries & Construction

MNR Shastri Accountant

19 Nikhil refinance Mr. Srinivas

20 Binjusaria ispat ltd. Mr. nandkishore

The various steps followed by a credit rating agency while applying a rating to a

corporate is given below:

28

Source: http://www.fitchindia.com/BLR_India_FINAL_low_res_Dec08.pdf

For rating corporate borrowers, Fitch Ratings would typically apply its corporate

rating methodology as used for rating bonds and other capital market instruments.

a. Qualitative Analysis: Covers Industry Risk, Operating Environment, Market

Position, Management, Accounting and Corporate Governance.

b. Quantitative Analysis: Covers Earnings and Cash Flow, Capital Structure and

Financial Flexibility.

c. Earning Measures: Analysis of FFO, EBITDAR, After Tax Cash Flows, Net Free

Cash Flows, Coverage Ratios (FFO/Gross Interest Expense, FCF/Capital

Expenditure).

d. Leverage Measures: Debt/EBITDA (Cash Leverage), Net Debt/Equity (Gearing).

29

e. Profitability Measures: Analyses EBITDA/Operating Income and Return on

Equity/Return on Capital Employed.

The following is the no. of items required from issuer by the credit rating team to start

with the rating process:-

ANALYSIS OF CONSTRUCTION AND INFRASTRUCTURE SECTORS IN INDIA

30

As I was allotted to do marketing of Bank Loan Ratings in Construction and

Infrastructure Sectors, in this section I have done analysis of the two sectors

performance in India.

1.9 ANALYSIS OF CONSTRUCTION SECTOR

Fitch Ratings expects the credit profile of this sector to be stable in 2012. There are

various factors which are taken into consideration to give outlook ie some trigger

points are also there which affect the viewpoint the most.

Construction Industry in India can be categorized in the following -:

Residential, industrial, commercial, and other buildings.

Sewers, roads, highways, bridges, tunnels, and other projects.

Specialized activities such as carpentry, painting, plumbing, and electrical

work.

Outlook for Indian construction industry -:

Expected growth of wage and salary jobs in the construction industry will be

about 15 percent through the year 2012.

The demand for residential construction is expected to continue to grow.

Construction of nursing homes, Old Age homes, and other extended care

institutions also will increase due to aging population.

Employment in heavy and civil engineering construction is projected to

increase

Due to increase in highway, bridge, and street construction

FACTORS CONSIDERED TO GIVE THE OUTLOOK IN CONSTRUCTION

SECTOR

Fitch expects the build-operate-transfer (BOT) portfolio to grow and companies will

have to invest substantial equity into these infrastructure projects for execution.

1) Order Inflows- It is the no. of orders to construct something, which construction

companies will get. Fitch expects order inflows to slow down and order books to

remain stagnant in 2012. While order inflows from the industrial sector are expected

31

to weaken as corporate sector capex plans are deferred amid slowing GDP growth,

order inflows from the transportation sector and other infrastructure segments

(except power) are expected to remain buoyant.

2) Ability to Raise Equity: Construction companies need a huge amount of funds to

finance its raw material and go ahead with the construction process. But Fitch feels

that the construction companies are faced with a lack of interest in the IPO market,

various companies raised funds from private equity investors at the parent or

intermediate holding company level for investments in BOT projects during 2011. But

continuing volatility in stock markets and weakening economic conditions may

hamper plans to raise funds. Alternatively, funding of such investments through debt

at the parent level would put pressure on their ratings in the medium term.

3) Interest Rates: It is the rate at which the companies raise loan from banks or

financial institutions. But the increase in interest rates in India due to Inflation has led

to a deterioration of debt coverage ratios for construction companies. The higher

interest rates may also lead to an increase in the cost of BOT/BOOT projects and

hurt their ability to service debts upon operation which could mean their holding

entities (sponsors) are required to give greater support to the companies otherwise

they can face a lot of problem in future.

4) Execution Challenges: The tasks of construction companies are pretty

challenging. So companies which rely on sub-contractors for the execution of their

projects may experience difficulties. As sub-contractors themselves are facing

challenges in managing their working capital, due to the contraction in bank funding

which is not a good news for the construction companies.

5) EBITDA Margins: The rating depends mostly on the financial performance of the

companies. So Fitch expects the EBITDA margins of most companies in this sector

to be stable. However, Fitch also feels that those companies with a higher proportion

of fixed price engineering procurement and construction (EPC) contracts may see a

contraction in margins if there is a substantial movement in material prices. Those

32

companies which had bid for projects aggressively in the past may also see a fall in

margins.

6) Working Capital: It is the fund required to carry on the day to day activities of the

company. The working capital position of most Fitch-rated companies was stable

during 2011 and is expected to remain stable in 2012. However, smaller sub-

contractors may face liquidity pressures due to a contraction in bank funding.

TRIGGER POINTS IN CONSTRUCTION SECTOR

Fitch has given STABLE outlook based on the past performance of all the

companies in the sector together. But this outlook can be changed on the basis of

some points which are -:

1) Inability to Raise Funds: Fitch feels the outlook could be revised to negative

during the year in the event of a higher-than-expected slowdown in order inflows and

an inability to fund investments in BOT/BOOT projects through equity injections.

2) No Positive Change overall: Fitch does not expect a positive change to the

outlook during the year. Positive rating actions, if any, would be driven by individual

credit profiles ie if the companies will go for rating, it could be positive also based on

their performance rather than the performance of the sector.

SWOT Analysis of Construction Industries in India

Strengths

There are ample employment and training opportunities in the field of

construction.

There is private sector housing boom and commercial building demands

Multi building projects are being constructed on the feasible locations in the

country.

Availability of low cost well- educated and skilled labour force in the country.

33

There is sufficient availability of raw material and natural resources in the

country.

Weakness

Distance between construction projects reduces business efficiency.

Changing skills requirements and an ageing workforce may emphasize the

skills gap.

Improvement in long-term career prospects is highly required to encourage

staff retention and new entrants.

There is difficulty in external allocation of large contracts.

There are lack of clearly defined processes and procedures for construction

and its management.

Huge amount of money needs to be invested in this industry

Opportunities

Continuous private sector housing boom will create more construction

opportunities.

Public sector projects through Public Private Partnerships will bring further

opportunities.

Opportunities offered by renewable energy projects to develop skills and

capacity in new markets.

Availability of more flexible training delivery techniques

Financial supports like loan and insurance and growth in income of people is

in support of construction industry

Threats

Current economic situation may have an adverse impact on construction

industry

Political and security conditions in the region are always threats to any

industry in India.

Infrastructure safety is a challenging task in construction industry.

Lack of political willingness and support on promoting new strategies.

Natural abnormal casualties such as earth quake and floods are uncertain

and can prevent the construction boom.

34

There is stiff competition in the industry.

1.10 ANALYSIS OF INFRASTRUCTURE SECTOR

Fitch Ratings has given overall Negative outlook to infrastructure sector.

Infrastructure sector can be sub- divided into the following

Toll roads

Airports

Thermal Power Projects

Biomass Power

Summary of 2012 Sub-Sector Outlooks

Sector 2010 2011 2012

Toll roads Stable Stable Stable to

Negative

Airports Stable Stable Stable to

Negative

Thermal

power

projects

Stable Stable Negative

Biomass

power

Stable Negative

FACTORS CONSIDERED TO GIVE THE OUTLOOK IN INFRASTRUCTURE

SECTOR

35

1) Availability of fuel- The power project subsector is most exposed to fuel

shortages and low credit quality among customers. Many projects approaching

commercial operations date (COD) could be stranded due to lack of fuel.

2) Counterparties Involved- Deteriorating finances among state-owned off-taker

utilities will pose greater risks for projects with high generation costs.

3) Toll road exposures - Toll roads that enter the ramp-up phase in a prolonged

slowdown could be negatively affected, as in the 2008-2009 global financial crises,

when GDP growth was still 7%. Because most projects suffer from poor initial

demand forecasts, external shocks tend to magnify traffic risk. Roads dependent on

international trade such as port connections, or serving industries catering to export

markets could suffer from lower patronage.

4) Interest Rates - Most projects are bank funded, with floating rates. Interest rates

have risen sharply. The increased cost is beginning to affect projects structured with

thin financial margins. If rates remain high, weaker projects’ ability to cover debt

service from project cash flows without sponsor support will be impaired.

TRIGGER POINTS IN INFRASTRUCTURE SECTOR

1) Policy Initiatives- If issues pertaining to land acquisition, permitting and systemic

fuel shortages are addressed through committed and forceful policy action,

completion and operations risks may be mitigated, enabling projects to stabilize their

credit profiles. Softening interest rates could provide relief to stressed cash flows.

2) Interest Rates- At present the interest rates are pretty high. But Softening interest

rates could provide relief to stressed cash flows of the companies in this sector.

SWOT Analysis of Infrastructure Industry in India

Strengths

36

There is decline in Merchant Power Prices

State Government Policy on Tariffs – Govt set up low tariffs for few power

companies.

Weakness

Weak cash flows in the companies.

Completion Risk – Very few projects are completed on the deadline.

Stringent processes involved in the infrastructure sector

Fuel constraints- Domestic coal availability, primarily dependent on the

dominant government producer, is unlikely to be able to feed all the new

projects.

High oil prices in combination with a falling currency have severely affected

airline operators’ financial positions.

Opportunities

People want to go for non renewable sources of energy like biomass which is

available at lower cost

Population is increasing for which more and more infrastructure development

is needed in the country

Threats

Environmental effects - the adverse effect on the environment is the biggest

threat

Weakening Off-Taker Credit Quality- A worsening of the financial position of a

number of state government-owned electric utilities has increased the off-take

counterparty risk for a few projects.

Revenue Risk - Roads carrying a greater proportion of commercial vehicles

are likely to be more susceptible than others to an economic slowdown

Weak Counterparties: Deteriorating finances among state-owned off-taker

utilities will pose greater risks for projects with high generation costs.

Recession Risk for Airports: Declining global economic activity and a

potential recession in developed economies could adversely affect airport

traffic

37

High Interest Rates Risk: The increased cost is beginning to affect projects

structured with thin financial margins.

1.11 RECOMMENDATIONS:

From the various incidents mentioned by issuers about the rating process

taking more than its assigned average of 4 weeks, I c

The strategy of Fitch needs to undergo a change in order to increase the

customer base as the Indian customer is highly price sensitive.

Fitch needs to hire few people in the BRM team as only 2 people are not

sufficient to take care of the entire operations in the region.

The prices of Fitch is too high in comparison to other CRA’s

As Banks mostly do not recommend Fitch to their customers, Fitch needs to

develop good relation with all the banks in the city and not only few banks like

Andhra Bank and SBH ( which are its focus presently )

Coordination between BRM team and Credit team is bit lagging which could

be quite annoying to the issuers, so Fitch needs to work on that.

Very few companies are aware about Fitch, so Fitch BRM team needs to

meet them frequently to build relationship with them.

1.12 LOGOS DESIGNED FOR FITCH RATINGS

As Fitch ratings does not have any logo as of now, I have designed few logos for the

company.

38

The arrows in FR indicate that the Rating provided by Fitch is up to the mark based

on financial performance and is free from all the biases.

1.13 Comparison between Credit Rating Agencies – CRISIL, ICRA,

CARE & FITCH.

39

Objective: To know the difference in the working of the Credit Rating Agencies –

CRISIL, ICRA, CARE and FITCH.

Methodology:

Visited all these other rating agencies to know their details

From their respective websites.

From the Bankers which we visited

From the proposals which we got from these companies as a prospective

clients.

Findings:

It is a global analytical company providing ratings, research, and risk and policy

advisory services. It is India's leading ratings agency. It is also the foremost provider

of high-end research to the world's largest banks and leading corporations. Its

majority shareholder is Standard & Poor's, a part of The McGraw-Hill Companies, is

the world's foremost provider of credit ratings.

No. Of Companies rated In AP is 1000.

Time taken to complete the rating process is 3 weeks.

Items in their checklist are 5.

CRISIL has tie up with certain banks, which provide lists of clients only to

them. Like Federal Bank.

No. Of people in the credit team is around 30-35.

40

Market share of CRISIL is 39% approx.

Products being rated -:

1) Credit Ratings -

i) Bonds/ LT instruments ii) CPs/ ST instruments

iii) PTCs/ SF instruments iv) Bank Loan Ratings (Basel II)

2) SME Ratings Real Estate Ratings

3) Business School Grading 4)Broker Quality Grading

5) Financial Strength Ratings 6) Fund Ratings

7) GVC Ratings 8) Maritime Grading 9) MFI Grading

10) Project Credit Ratings 11) Recovery Risk Ratings

ICRA Limited (formerly Investment Information and Credit Rating Agency of India

Limited) was set up in 1991 by leading financial/investment institutions, commercial

banks and financial services companies as an independent and professional

Investment Information and Credit Rating Agency. The international Credit Rating

Agency Moody’s Investors Service is ICRA’s largest shareholder.

No. Of Companies rated In AP is 800.

Time taken to complete the rating process is 15 days

41

No. Of Items in their checklistare 21.

No. Of people in the credit team is around 25.

Market share of ICRA is 31% approx.

Products being offered by them -:

Ratings-

1) Corporate Debt Rating 2) Financial Sector Rating 3)Issuer rating 4)Bank Loan

rating 5)Corporate Governance Rating 6)Public finance rating 7)Structured

finance rating 8)SME rating 9)Mutual Fund rating 10)Infrastructure sector

rating 11)Insurance Sector rating 12) Project finance rating

Grading–

1) IPO Grading 2)Solar Power Grading 3)Microfinance Institutions Grading

4)Construction Grading 5)Real Estate Grading 6)Maritime Grading 7)Healthcare

Grading

CARE Ratings commenced operations in April 1993 and over nearly two decades, it

has established itself as the second-largest credit rating agency in India. CARE

Ratings commenced operations in April 1993 and over nearly two decades, it has

established itself as the second-largest credit rating agency in India.

No. Of Companies rated In AP is 550.

42

Time taken to complete the rating process is 3-4 weeks.

Items in their checklist vary industry wise.

No. Of people in the credit team is around 35-40.

Market share of CARE is 22% approx.

Products being offered by them are -:

1) Corporate

a)Corporate Debt Rating b)Bank Loan Ratingsc)Issuer Rating

d)Corporate Governance Ratinge)Recovery Rating

2) Financial Sector Rating3)Structured Finance Rating

4)Public Finance Rating5)SME Rating

6) SSI/ MSE Rating7)Infrastructure Sector Rating

8) Project Finance Rating

Fitch Ratings is a leading global rating agency committed to providing the world's

credit markets.

No. Of Companies rated In AP is 200.

Time taken to complete the rating process is 4-6 weeks.

Items in their check list 25.

No. Of people in the credit team is only 4.

Market share of Fitch is 8% approx.

43

Products being rated by them -:

1) Bank Loan Rating 2) SSI/SME Rating

3) IPO Grading 4) MNRE/ Solar Grading

Comparison in a tabular form

39%

22%

31%

8%

Market shareCRISILCAREICRAFITCH

44

Parameters CRISIL CARE ICRA

CRISIL CARE ICRA FITCH0

200

400

600

800

1000

1200

No. of companies rated in A.P.

No. of com-panies rated in A.P.

CRISIL CARE ICRA FITCH0

1

2

3

4

5

6

Duration of Rating process (weeks)

Duration of Rat-ing process (weeks)

CRISIL CARE ICRA FITCH0

5

10

15

20

25

30

No.of Items in Check list

No.of Items in Check list

CRISIL CARE ICRA FITCH0

5

10

15

20

25

No. of products of-fered

No. of products offered

45

1.14 Details on CREDIT PROJECT

Apart from the Business Development Project, I am also working on a credit project

in which we have to develop the template. We are working on developing a template

for Real Estate companies.

Introduction:

Specific Credit Factors: This report addresses Fitch Ratings’ specific credit factors

used when analysing Indian real estate companies on the national scale. After

highlighting the sector risk profile, it defines and groups the ratings of companies

operating in the sector into a “natural rating territory”, based on Fitch’s view of the

inherent risk profile of the sector. The report then examines additional company-

specific traits that may influence the rating and therefore more finely categorise

companies by rating level. Finally, the report explains how a company’s financial

profile (credit metrics) influences its creditworthiness and final rating.

Sector Risk Profile:

Fragmented and dominated by regional players: The real estate sector in India is

regional, limiting their activities to certain cities and at best to cities within a region.

There are only a handful of players who have recently ventured to create a pan-India

footprint. Cities have their own set of builders ranging from Grade A premium names

to very small local players. In such a scenario, the reputation of the builder and his

project implementation track record takes primary importance in accessing the credit

worthiness of companies.

Cost structure: Volatility of the price of construction materials (steel and cement in

particular) as well as availability of labour are vital factors impacting margins of

companies. In CY2011, the industry has been plagued by rising input costs, together

with a shortage of labour (due to various rural employment schemes introduced by

the Government) and hence increase in wage cost. This adversely impacted the

margins of companies in this period, more so as it was in tandem with economic

slowdown in the country, which impacted the demand for real estate.

Cyclical Industry: The Indian real estate sector is cyclical in nature, and its fortunes

are closely contingent on the country’s economic situation. The sector can be

46

broadly divided into residential, commercial and retail. Periods of expanding

economic growth lead to demand of commercial space and through job creation,

salary increases and cheaper access to debt, foster residential demand in general.

Company-Specific Traits

Rating Categories: Fitch Ratings examines a number of sector-specific

characteristics and outlines rating categories for companies that display these under

company-specific traits. It is rare that a company will track exactly to the same rating

category for each trait or ratio. While rating committees take all factors into

consideration, they will weight some of the factors more heavily than others, such as

the cost position of operations, liquidity and financial profile.

Differentiating factors: Fitch’s approach to differentiating between companies in

this sector is both qualitative and quantitative. The qualitative factors include

promoter reputation, location advantage of the project, quantum and quality of land

bank, geographical concentration, booking levels (residential), occupancy levels

(commercial) and reputation of tenants in case of commercial. The quantitative

factors include EBITDA margin, gearing, cash cover (residential) / DSCR

(commercial) interest cover, Debt / EBITDA.

Non-financial factors

Promoter Reputation: In case of real estate companies the reputation of the

promoter is vital. Here we will look at his experience in the industry, and his track

record in completing projects as per schedule and as per committed specifications.

Projects of promoters with a market perception that rates it high on reputation would

generally command a premium and thus have higher margins vis-à-vis projects of

promoters who rank lower.

  AA A BBB BB

Promoter

reputation

Reputed name

in the industry,

with a proven

track record of

successfully

Reputed

name in the

industry,

with a

proven track

Reputed

builder with

good track

record, but

lower than

Relatively new

entrant /not so

reputed

47

having

implemented

real state

projects. May

even be part of

a

conglomerate,

(Tata, Godrej),

thus imparting

promoter

strength

record pf

successfully

having

implemente

d real estate

projects.

Brand name

of builder

will garner

premium.

the A and

AA

categories in

terms of

brand

perception

Location Advantage: Projects that are located in close proximity to the main hub /

rapidly developing areas of the city command better price than those located in far

flung places. Newly developed neighbourhoods maybe as attractive as old

established ones if supported by necessary civic infrastructure. These would include

good quality roads as well as public transport providing access to major area –

especially in case of commercial hubs, connecting these to the residential areas.

Residential developments will require infrastructure like schools, hospitals, malls,

supermarkets, parks entertainment centres in close proximity.

  AA A BBB BB

Location

advantage

CBD / Prime residential CBD / Prime

residential

Suburba

n /

Suburba

n resi

Periphera

l

/Peripher

al resi

Land Bank: Land is a vital resource for real estate companies. We look at land

available for development activities for the next five years. If a company hold more

than it requires for its development needs over a five year period, then it is regarded

48

as stock which cannot be readily monetised in the medium term. While acquiring

new land may be prohibitively expensive, especially within city limits, Fitch views

favourably Joint Development (JD) options which are cheaper alternatives to land

acquisition. Here, the land owner if given a pre-agreed proportion of the built-up

space (typically 30-40%), which he is free to sell / lease / rent, while the builder gets

the benefit of the land without any cash outflow, and also this works out to be

cheaper than outright purchase of the land.

  AA A BBB BB

Land bank Has very low cost

land / JD opportunities

to take care of next 5

years development

needs

Has

moderately

low cost

land / JD

opportuniti

es to take

care of

next 5

years

developme

nt needs

Land

available to

cover near

term

developme

nt needs,

but not

necessarily

at an

attractive

cost

Inadequate

access to

land to

cover

medium

term

developme

nt needs

Geographical concentration: Real estate companies mainly operate in a particular

city or in a few contingent cities. We view favourably builders who have projects

across regions. Familiarity with the market in different regions will enable them to

hedge against a sluggish demand / competition in a particular region, and also take

advantage of local factors boosting the demand in a region. The table below

provides broad guidelines on the degree of geographical concentration for various

categories.

  AA A BBB BB

49

Geographical

concentration in a city

(in terms of space under

construction)

<60

%

60-

75%

Moderate

75-85%

High >85% of

projects

Residential booking levels: The construction cost of residential projects is funded

by a mix of promoter equity, debt and customer advances. Banks typically would

fund up to 70% of the construction cost. The primary source of the loan repayment is

the receivables from sales. Thus, when we are accessing the credit worthiness of

real estate companies, the booking level of residential projects are of vital

importance which determines the timely debt repayment ability of the company. Low

booking level does not mean that the company can stop constructing – it may at

most slowdown. Thus low booking means that while construction cost is being

incurred funded by the loan, cash inflows are lower than that required to service

debt. Slowing construction further impacts the reputation of the builder, and may

adversely impact sales of future launches. In case of single project companies, the

problem is more acute than in case of multiple project companies. In the latter case,

unencumbered cash surplus from one project can be used to meet debt repayment

obligations of a project with weak cash flows where bookings are low. For multiple

project companies, we will look at the over all booking level for all projects as a

whole. Typically, booking levels will be lower at the start of a project, and will

increase as the project progresses, and timely completion is more certain.

  AA A BBB BB

Booking levels

(residential)

70-80% 60-70% 50-60% <50%

Commercial occupancy levels: Commercial properties constructed by builders are

not sold out-right – office spaces are leased out to companies. Construction loan

50

taken for properties are repaid through lease rental discounting (LRD). Banks

discount the net lease rentals (after netting off any recurring costs) that the real

estate company receives from a property for a specified period (eg. 5 years or 7

years), and 70-75% of this is given as a loan to the company. The company uses

this to repay the original construction loan to the bank, and the cash from the rentals

are used to repay the LRD in the form of equated monthly instalments (EMI). The

interest on the LRD loan is periodically reset as mutually agreed between the

company and the bank. Hence for commercial properties the level of occupancy

becomes vital in analysing a company’s debt repayment ability. In case of new

construction, comfort is drawn in situations where spaces are leased out before

construction commences.

  AA A BBB BB

Occupancy level

(commercial)

Almost all

space pre-

sold

Significant

(80%+) pre-

sold

Moderate

presales (70-

80%)

Presales

<70%

Reputation of tenants in commercial properties: Since lease rentals are the

primary repayment source for LRD loans, the reputation of tenants occupying

commercial spaces assumes importance as this will determine the degree of

unhindered rental inflow. Ideally, offices of reputed MNCs who have long term plans

of spreading their business in the country or strong Indian corporates are regarded

as ‘safe’ tenants, likely to stay till the end of the contract period, and renew contracts

periodically. Long association with the lessee, especially when the lessor occupies

substantial commercial space is likely to result discounts in rentals and encourage

the lessor to continue. Such tenants are least likely to result in vacancy. We would

view with caution small companies, especially which are either not performing well at

a company level, or are in recessionary industries – such tenants are likely to

downsize operations and vacate leased office premises.

  AA A BBB BB

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Reputation of

tenants

Highly reputed

tenants (eg.

Reputed

MNCs, and

Indian

companies)

with good

business

prospects who

are highly

likely to renew

contracts in

the

foreseeable

future.

Reputed

tenants with

favourable

business

outlook in

the near

term, who

are likely to

renew

contracts

Good

profile,

maybe

reputed

medium

scale local

companies

, with

relatively

good

business

outlook,

with a

moderate

likelihood

of

renewing

contracts

Moderate

tenant

profile,

which

moderate

risk of non-

renewal of

contract

Financial factors

Strength of project cash flow: While analysing real estate companies, we do not

focus on the monthly cash flow rather than on revenues and P&L statement. This is

because the P&L revenue is accounted on a percentage completion method, and

does not give the true picture of the cash inflow from sales. Cash from sale of flats

flow in at regular intervals. Eg. 20% at the time of booking, then remaining in equal

quarterly instalments over 24 months. Apart from the construction loan drawdown

and promoter funding, this is primarily the cash that the company has repay its debt

obligation. The following table shows how we analyse the cash flows form flat sales.

We calculate debt service coverage ratio (DSCR) as defined below (both with and

without opening cash balance), as a parameter to analyse the strength of the project

cash flows.

52

The table below distinguishes between cash flow from new sales and past sales.

Cash flow from new sales is nothing but the 20% upfront payment as in the example

in the above paragraph, while cash flow form past sales is the remaining 80% that

has to be paid over a period.

We can use the cash flow table to make the following analysis:

(1) If there are no new sales, then for how many periods can past sales sustain

committed expenses including debt service?

(2) What is the minimum number of new flats that need to be sold in each period

to breakeven, i.e. arrive at a DSCR of 1?

INR mn P1 P2 P3 --- Pn

Opening cash        

Cash inflow from new sales        

Cash inflow from past sales        

Loan inflow        

Other inflow (equity, land sales etc)        

A: Total cash available          

Construction cost        

SG&A        

Taxes        

B: Total cash expenses          

C = A - B: Cash available for debt

service

         

Interest payment        

Principal payment        

D: Total debt service          

53

E: C – D: Closing cash

C/D: DSCR with opening cash          

(C less opening cash) / D: DSCR

without opening cash

         

Profitability: EBITDA margin: Construction costs like steel, cement as well as

labour costs impact margins of real estate companies. In a given project, if

construction costs increase after majority of apartments has been sold, the company

will not be able to pass on the increased costs to the consumers. Also, if increase in

construction costs happen at a time when demand is sluggish, then it is difficult for

the company to pass on the costs to the end consumer, as well as to boost up sales

by offering discounts. We look at the EBITDA margin to understand the profitability.

A margin compression is to be viewed with caution as ultimately it will adversely

impact the coverage and leverage of the company.

Leverage and financial flexibility: Leverage provides a measure of the company’s

ability of service its debt from its operating profits. To measure leverage, we use

Debt / EBITDA. In order to understand the company’s financial flexibility we look at

the gearing (total debt / total net worth) ratio. A low gearing means the company has

the financial flexibility to raise further debt either for new projects, debt refinancing or

for tiding over short term cash flow mismatches. A high gearing may threaten

liquidity by restricting avenues for fund raising.

1.15 ANNEXURE

Training schedule was as follows-:

54

Summer Trainee Program

Time table of training program

  Program particulars

Day 1 Topic

1. Fitch Introduction

  2. About Credit Ratings

  3. Basel-II Norms

  4. Reading the Material

   

Day 2 Topic

1. About the Banking

2. About RBI & SEBI

  2. Types of Bank Funding

  4. Reading the Material

Day 3 Topic

1. About of Balance sheet items

  2. Industries in AP /Hyd.

  3. Types of Companies

  4. Reading the Material

   

Day 4 Topic

1. Bank Loan Rating Process

2. How to Plan for meetings?

 

3. How to interact with company

officials?

  4. Reading the Material

Day 5 Topic

1. About Questionnaire

2. Points to be discussed during

55

the mtg.

  3. Reading the Material

 

Day 6 Topic

  Mock Meetings-1

   

Day 7 Topic

Mock Meetings-2

 

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1.16 REFERENCES:

http://en.wikipedia.org/wiki/Basel_I

http://www.piie.com/publications/chapters_preview/4235/03iie4235.pdf

http://www.investopedia.com/terms/b/basel_I.asp

http://www.fitchratings.com/jsp/creditdesk/AboutFitch.faces?context=1&detail=1

http://www.fitchratings.com/web_content/marcom/corporate_brochure.pdf

http://www.fitchratings.com/jsp/creditdesk/AboutFitch.faces?context=1&detail=3

http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CCRA030310_R2.pdf

http://rru.worldbank.org/documents/CrisisResponse/Note8.pdf

http://www.signet.org.uk/public_pdf/12%20and%2013%20Return%20on%20capital

%20employed.pdf

http://www.ischool.utexas.edu/~palmquis/courses/content.html

http://chiaraogan.com/euroia_cfox08.pdf

http://www.unctad.org/en/docs/osgdp20081_en.pdf

http://www.investopedia.com/terms/e/ebitdar.asp

http://samples.breakingintowallstreet.com.s3.amazonaws.com/23-BIWS-Debt-

Primer.pdf

http://writing.colostate.edu/guides/research/content/

http://www.audiencedialogue.net/kya16a.html

http://www.bis.org/bcbs/ca/lwhit.pdf

http://www.projectsmonitor.com/MISC/swot-analysis-of-indian-infrastructure-is-

encouraging

https://www2.bc.edu/~kisgen/Kisgen-CRCS2.pdf

60

http://www.cfr.org/united-states/credit-rating-controversy/p22328

http://www.adbi.org/working-paper/

2010/01/26/3446.credit.rating.agencies.european.banking/

the.role.played.by.credit.rating.agencies.in.the.financial.crisis/

http://mostlyeconomics.wordpress.com/2009/09/03/history-of-credit-rating-agencies/

http://mgt.guc.edu.eg/wpapers/026hassan_kalhoefer2011.pdf

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=904077

http://www.isb.gov.uk/hmt.isb.application.2/BIDDERS/Definition%20of%20Capital

%20Expenditure.pdf

http://www.universalteacher4u.com/cbse/xii/acctheory/ch11/page1.htm

http://pages.stern.nyu.edu/~igiddy/articles/ebitda.pdf

http://www.marketresearchindia.in/

Real_Estate_&_Construction_Market_Research_in_India.pdf

http://www.iitk.ac.in/infocell/announce/convention/papers/Changing%20Playfield-07-

Milind%20Despande%20final.pdf

61