Shri Vile Parle Kelvani Mandal’s Mithibai College Of Arts, Chauhan Institute Of Science & Amrutben Jivanlal College Of Commerce And Economics Vile Parle (West) Mumbai 400056
PROJECT REPORT ON CREDIT RATING AGENCY IN INDIA
Submitted by: REEMA G. LIMBACHIA
BACHELOR OF COMMERCE BANKING & INSURANCE SEMESTER V MITHIBAI COLLEGE VILE PARLE (W) SUBMITTED TO UNIVERSITY OF MUMBAI ACADEMIC YEAR 2013 - 2014
NAME OF PROJECT GUIDE
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PROF.RIDDHI SHARMA
CERTIFICATE
I, Prof. Riddhi Sharma, hereby certify that REEMA G. LIMBACHIA of MITHIBAI COLLEGE OF TYBBI [Semester V] has completed the project CREDIT RATING AGENCY IN INDIA in the academic year 2013 - 14. The information submitted is true and original to my knowledge.
_______________________ Signature of Principal
_____________________ Project Guide (Prof. Riddhi Sharma)
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External Examiner
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College Seal
DECLARATION
I, REEMA G. LIMBACHIA OF MITHIBAI COLLEGE Of TYBBI [Semester V] hereby declare that I have compiled this project on CREDIT RATING AGENCY IN INDIA in the academic year 2013 - 14. The information submitted is true and original to the best of my knowledge.
DATE:
20/10/2013
PLACE: Mumbai
(REEMA G. LIMBACHIA) Roll No. - 21
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TYBBI
ACKNOWLEDGEMENT
I would like to thank Mithibai College & the faculty members of BBI for giving me an opportunity to prepare a project on "CREDIT RATING AGENCY IN INDIA ". It has truly been an invaluable learning experience. Completing a task is never one man's effort. It is often the result of invaluable contribution of number of individuals in direct or indirect way in shaping success and achieving it. I would like to thank principal of the college Dr. D.B. GADKARI and Co-coordinator Prof. NARESH SUKHANI for granting permission for this project. I would like to extend my sincere gratitude and appreciation to Prof. Riddhi Sharma who guided me in the study of this project. It has indeed been a great learning, experiencing and working under him during the course of the project. I would like to appreciate all my colleagues and family members who gave me support and backing and always came forward whenever a helping hand was needed. I would like to express my gratitude to all those who gave me the possibility to complete this thesis.
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EXECUTIVE SUMMARY
The banking sector in India underwent an unprecedented transformation in the 1990s with the emergence of a large number of private as well as foreign multinational banks entering the country increasing rapidly the number of banks in India due to the economic reforms. So the banking activities increased manifold and affected a large number of areas of operation of banks, particularly in the field of bank lending. Banks operate on the pattern of extending credit against security given by its customers associated with the bank. The facility of extending credit agencies are recognition of the changing times in which banks have to operate in a changing and ever evolving economic scenario. Growing needs and realization of higher rate of investments is giving birth to bank credit in India.
Credit rating agencies play an important role in assessing risk and its location and distribution in the financial system. By facilitating investment decisions they can help investors in achieving a balance in the risk return profile and at the same time assist firms in accessing capital at low cost. CRAs can thus potentially help to allocate capital efficiently across all sectors of the economy by pricing risk appropriately. However, in view of the fact that CRAs that rate capital market instruments are regulated by SEBI and that entities regulated by other regulators (IRDA, PFRDA and RBI) predominantly use the ratings, it was felt necessary to institute a comprehensive review of the registration, regulatory and supervisory regime for CRAs. The major motivation for the exercise was to look at inter regulatory coordination so that all interested stake holders have an institutional mechanism for providing inputs feed back to ensure realization of the objective behind the regulation of CRAs.
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RESEARCH METHODOLOGY
Objectives of the research:
To study Credit Rating Agencies in India
Secondary Data:
The secondary data has been collected from various reference books and websites which have been mentioned in the bibliography at the end of the project
Limitations of the Research:
Problems of selection of right information available from various sources
Scope of the Research:
The main objective of the project is to get to know about Credit Rating Agencies in India and importance from the investor’s point of view. Credit Rating is an objective assessment of a borrower’s credit quality in terms of business and financial risks.
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TABLE OF CONTENT
PAGE NO.
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SR.NO
1 2 3 4 5 6 Introduction
PARTICULARS
Meaning and Definition Factors Affecting Assigned Ratings Functions, Benefits and Disadvantages Types of Ratings Roles and Operations of Credit Rating Agencies : CRISIL, ICRA and CARE Credit Rating Process of Fixed Income Instrument : HDFC Credit Rating Process for IPO: CASE STUDY OF COAL INDIA PVT. LTD. SEBI Regulations : General Obligations of Credit Rating Agencies Conclusion Recommendation Bibliography
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CHAPTER 1 Introduction of Credit Rating Agency
Evolution of Credit Rating Agencies
The origins of credit rating can be traced to the 1840's. Following the financial crisis of 1837, Louis Tappan established the first mercantile credit agency in New York in 1841. The agency rated the ability of merchants to pay their financial obligations. Robert Dun subsequently acquired it and its first rating guide was published in 1859. John Bradstreet set up another similar agency in 1849, which published a rating book in 1857. These two agencies were merged together to form Dun and Bradstreet in 1933, which became the owner of Moody's Investors Service in 1962. The history of Moody's itself goes back about 100 years. John Moody (1868 - 1958) was a self-taught reformer who had a strong entrepreneurial drive and a firm belief about the needs of the investment community - as well as considerable journalistic talent. Relying on his assessment of the market’s needs, John Moody and Company published Moody’s Manual of Industrial and Miscellaneous Securities in 1900, the company’s founding year. The manual provided information and statistics on stocks and bonds of financial institutions, government agencies, manufacturing, mining, utilities, and food companies. Within two months, the publication had sold out. By 1903, circulation had exploded, and Moody’s Manual was known from coast to coast.
When the stock market crashed in 1907, Moody’s company did not have adequate capital to survive, and he was forced to sell his manual business. Moody returned to the financial market in 1909 with a new idea.
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Instead of simply collecting information on the property, capitalization, and management of companies, he now offered investors an analysis of security values. His company would publish a book that analyzed the railroads and their outstanding securities. It offered concise conclusions about their relative investment quality. Moody had now entered the business of analyzing the stocks and bonds of America’s railroads, and with this endeavor, he became the first to rate public market securities. In 1909, Moody’s Analyses of Railroad Investments described for readers the analytic principles that Moody used to assess a railroad’s operations, management, and finance. The new manual quickly found a place in investors’ hands. In 1913, he expanded his base of analyzed companies, launching his evaluation of industrial companies and utilities. By that time, the "Moody's ratings" had become a factor in the bond market. On July 1, 1914, Moody's Investors Service was incorporated. That same year, Moody began expanding rating coverage to bonds issued by US cities and other municipalities.
Further expansion of the credit rating industry took place in 1916, when the Poor's Publishing Company published its first rating followed by the Standard Statistics Company in 1922, and Fitch Publishing Company in 1924. The Standard Statistics Company merged in 1941 to form Standard and Poor's, which was subsequently taken, over by McGraw Hill in 1966. For almost 50 years, since the setting up of Fitch Publishing in 1924, there were no major new entrants in the field of credit rating and then in the 1970s, a number of credit rating agencies commenced operations all over the world. These included the Canadian Bond Rating Service (1972), Thomson Bank watch (1974), Japanese Bond Rating Institute (1975), McCarthy Crisani and Maffei (1975 acquired by Duff and Phelps in 1991), Dominican Bond Rating Service (1997), IBCA Limited (1978), and Duff and Phelps Credit Rating Company (1980). There are credit rating agencies in operation in many other countries such as Malaysia, Philippines, Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia.
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In India, the Credit Rating and Information Services of India Ltd. (CRISIL) was set up as the first rating agency in 1987, followed by ICRA Ltd. (formerly known as Investment Information and Credit Rating Agency of India Limited) in 1991, and Credit Analysis and Research Ltd. (CARE) in 1994. The ownership pattern of all the three agencies is institutional.
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CHAPTER 2 CREDIT RATINGS: MEANING AND DEFINATION
Definitions of Credit Rating:
?A rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to 30 years or more. In addition, long term ratings incorporate an assessment of the expected monetary loss should a default occur." Moody’s
"Credit ratings help investors by providing an easily recognizable, simple tool that couples a possibly unknown issuer with an informative and meaningful symbol of credit quality." Standard and Poor’s
Ratings, usually expressed in alphabetical or alphanumeric symbols, are a simple and easily understood tool enabling the investor to differentiate between debt instruments based on their underlying credit quality. The credit rating is thus a symbolic indicator of the current opinion of the relative capability of the issuer to service its debt obligation in a timely fashion, with specific reference to the instrument being rated. It is focused on communicating to the investors, the relative ranking of the default loss probability for a given fixed income investment, in comparison with other rated instruments.
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In fact, the rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to 30 years or more. In addition, long-term rating incorporates an assessment of the expected monetary loss should a default occur. Credit rating helps investors by providing an easily recognizable, simple tool that couples a possible unknown issuer with an informative and meaningful symbol of credit quality. Credit rating can be defined as an expression, through use of symbols, of the opinion about credit quality of the issuer of security/instrument.
Credit rating does not amount to any recommendation to purchase, sell or hold that security. It is concerned with an act of assigning values by estimating worth or reputation of solvency, and honesty to repose trust in a person's ability and intention to repay. The ratings assigned are generally regarded in the investment community as an objective evaluation of the probability that a borrower will default on a given security issue. Default occurs whenever a security issuer is late in making one or more payments that it is legally obligated to make. In the case of a bond, when any interest or principal payment falls due and is not made on time, the bond is legally in default. While many defaulted bonds ultimately resume the payment of principal and interest, others never do, and the issuing company winds up in bankruptcy proceedings. In most instances, holders of bonds issued by a bankrupt company receive only a part amount on his investments, invested, once the company's assets are sold at auction. Thus, the investor who holds title to bankrupt bonds typically loses both principal and interest. It is no wonder, then, that security ratings are so closely followed by investors. In fact, many investors accept the ratings assigned by credit agencies as a substitute for their own investigation of a security's investment quality.
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CHAPTER 3 FACTORS AFEECTING ASSIGNED RATINGS
The following factors generally influence the ratings to be assigned by a credit rating agency: 1. The security issuer’s ability to service its debt. In order, they calculate the past and likely future cash flows and compare with fixed interest obligations of the issuer. 2. The volume and composition of outstanding debt. 3. The stability of the future cash flows and earning capacity of company. 4. The interest coverage ratio i.e. how many number of times the issuer is able to meet its fixed interest obligations. 5. Ratio of current assets to current liabilities (i.e. current ratio (CR) is calculated to assess the liquidity position of the issuing firm. 6. The value of assets pledged as collateral security and the security’s priority of claim against the issuing firm’s assets. 7. Market position of the company products is judged by the demand for the products, competitor’s market share, distribution channels etc. 8. Operational efficiency is judged by capacity utilization, prospects of expansion, modernization and diversification, availability of raw material etc. 9. Track record of promoters, directors and expertise of staff also affect the rating of a company...
In the Indian context, the scope of credit rating is limited generally to debt, commercial paper, fixed deposits and of late mutual funds as well. Therefore, it is the instrument, which is rated, and not the company.
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In other words, credit quality is not general evaluation of issuing organization, i.e. if debt of company XYZ is rated AAA and debt of company ABC is rated BBB, then it does not mean firm XYZ is better than firm ABC. However, the issuer company gets strength and credibility with the grade of rating awarded to the credit instrument it intends to issue to the public to raise funds. Rating, in a way, reflects the issuer's strength and soundness of operations and management. It expresses a view on its prospective composite performance and the organizational behavior based on the study of past results.
Further, the rating will differ for different instruments to be issued by the same company, within the same time span. For example, credit rating for a debenture issue will differ from that of a commercial paper or certificate of deposit for the same company because the nature of obligation is different in each case. Credit rating has been made mandatory for issuance of the following instruments (1) As per the regulations of Securities and Exchange Board of India (SEBI) public issue of debentures and bonds convertible/ redeemable beyond a period of 18 months need credit rating.
(2) As per the guidelines of Reserve Bank of India (RBI), one of the conditions for issuance of Commercial Paper in India is that the issue must have a rating not below the P2 grade from CRISIL/A2 grade from ICRA/PR2 from CARE.
(3) As per the guidelines of Reserve Bank of India (RBI), Non Banking Finance Companies (NBFCs) having net owned funds of more than Rs.2 core must get their fixed deposit programmers rated. The minimum rating required by the NBFCs to be eligible to raise fixed deposits are FA (-) from CRISIL/ MA (-) from ICRA/BBB from CARE. Similar regulations have been introduced by National Housing Bank (NHB) for housing finance companies also.
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(4) As per the regulations of the Ministry of Petroleum, the parallel marketers of Liquefied Petroleum Gas (LPG) and Superior Kerosene Oil (SKO) in India are also subjected to mandatory rating. The three rating agencies have a common approach for such rating and the dealers are categorized into four grades between 1 to 4 indicating good, satisfactory, low risk and high risk.
(5) There is a proposal for making the rating of fixed deposit programmers of limited companies, other than NBFCs also mandatory, by amendment of the companies Act 1956.
The clients for a credit rating agency:
Clients comprise manufacturing companies, non-banking finance companies, nationalized and private banks, financial institutions, public sector units, utilities, real estate developers, state governments, municipal corporations, stock brokers and others.
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CHAPTER 4 FUNCTIONS, BENEFITS AND DISADVANTAGES
Credit rating agencies serves the following functions:
(1) Provides superior Information It provides superior information on credit risk for three reasons: (i) It is an independent rating agency, and is likely to provide an unbiased opinion; unlike brokers, financial intermediaries and underwriters who have a vested interest in the issue, (ii) Due to professional and highly trained staff, their ability to assess risk is better, and finally, (iii) The rating firm has access to a lot of information, which may not be publicly available.
(2) Low cost information A rating firm gathers, analyses, interprets and summarizes complex information in a simple and readily understood formal manner. It is highly welcome by most investors who find it prohibitively expensive and simply impossible to do such credit evaluation of their own.
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(3) Basis for a proper risk and return If an instrument is rated by a credit rating agency, then such instrument enjoys higher confidence from investors. Investors have some idea as to what is the risk that he/she is likely to take, if investment is done in that security.
(4) Healthy discipline on corporate borrowers Higher credit rating to any credit investment tends to enhance the corporate image and visibility and hence it induces a healthy discipline on corporate.
(5) Greater credence to financial and other representation When a credit rating agency rates a security, its own reputation is at stake. Therefore, it seeks high quality financial and other information. As the issue complies with the demands of the credit rating agency on a continuing basis, its financial and other representations acquire greater credibility.
(6) Formation of public policy Public policy guidelines on what kinds of securities are eligible for inclusions in different kinds of institutional portfolios can be developed with greater confidence if debt securities are rated professionally.
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Benefits of credit rating
For different classes of persons different benefits accrue from the use of rated instruments. The benefits directly accruing to investors through rated instruments are:
(A) BENEFITS OF CREDIT RATINGS:
(A) Benefits of ratings to the investors
Investors are benefited in many ways if the corporate security in which they intend to invest their saving has been rated. Some of the benefits are:
(1) Safeguards against bankruptcy Credit rating of an instrument done by a credit rating agency gives an idea to the investors about the degree of financial strength of the issuing company, which enables him to decide about the investment. A highly rated instrument of a company gives an assurance to the investors of the safety of that instrument and a minimum risk of bankruptcy.
(2) Recognition of risk Credit rating provides investors with rating symbols that carry information in easily recognizable manner for the benefit of investors to perceive the risk involved in the investment. It becomes easier for the investors by looking at the symbol to understand the worth of the issuing company. The rating symbol gives them the idea about the risk involved or the expected advantages from the investment.
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(3) Credibility of issuer Rating gives a clue about the credibility of the issuing company. The rating agency is quite independent of the issuer company and has no business connections or any relationship with it or its Board of Directors, etc. Absence of business links between the rater and the rated firms establish ground for credibility and attract investors.
(4) Easy understandability of investment proposal An investor needs no analytical knowledge on his part and can understand the rating symbol. The investor can take quick decisions about the investment to be made in any particular rated security of a company.
(5) Saving of resources Investors rely upon credit rating. This relieves investors from botheration of knowing about the fundamentals of a company, its actual strength, financial standing, management details, etc. The quality of credit rating done by professional experts of the credit rating agency repose confidence in him to rely upon the rating for taking investment decisions.
(6) Independence of investment decisions For making investment decisions, investors have to seek advice of financial intermediaries, the stockbrokers, merchant bankers, the portfolio managers etc. about the good investment proposal. For rated instruments, investors need not depend upon the advice of these financial intermediaries as the rating symbol assigned to a particular instrument suggests the credit worthiness of the instrument and indicates the degree of risk involved in it.
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(7) Choice of investments Several alternative credit rating instruments are available at a particular point of time for investing in the capital market and the investors can make choice depending upon their own risk profile and diversification plan.
(8) Other advantages The investor can quickly understand the credit instrument and weigh the ratings with advantages from instruments; and make quick decisions to invest or sell or buy securities to take advantages of market conditions; or, perceiving of default risk by the company.
(B) Benefits of rating to the company Company which had its credit instrument or security rated by a credit rating agency is benefited in many ways as summarized below:
(1) Lower cost of borrowing A company with highly rated instrument has the opportunity to reduce the cost of borrowing from the public by quoting lesser interest on fixed deposits or debentures or bonds as the investors with low risk preference would come forward to invest in safe securities though yielding marginally lower rate of return.
(2) Wider audience for borrowing A company with a highly rated instrument can approach the investors extensively for the resource mobilization using the press media. Investors in different strata of the society could be attracted by higher rated instrument, as the investors understand the
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degree of certainty about timely payment of interest and principal on a debt instrument with better rating.
(3) Rating as marketing tool Companies with rated instruments improve their own image and avail of the rating as a marketing tool to create better image in dealing with its customers feel confident in the utility products manufactured by the companies carrying higher rating for their credit instruments.
(4) Reduction of cost in public issues A company with higher rated instrument is able to attract the investors and with least efforts can raise funds. Thus, the rated company can economize and minimize cost of public issues by controlling expenses on media coverage, conferences and other publicity stunts and gimmicks. Rating facilitates best pricing and timing of issues.
(5) Motivation for growth Rating provides motivation to the company for growth as the promoters feel confident in their own efforts and are encouraged to undertake expansion of their operations or new projects. With better image created though higher credit rating the company can mobilize funds from public and instructions or banks from self-assessment of its own status, which is subject to self-discipline and self-improvement, it can perceive and avoid sickness.
(6) Unknown issuer Credit rating provides recognition to a relatively unknown issuer while entering into the market through wider investor base who rely on rating grade rather than on 'name recognition'.
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(C) Benefits to brokers and financial intermediaries Rating is a useful tool for merchant bankers and other capital market intermediaries in the process of planning, pricing, underwriting and placement of issues. The intermediaries, like brokers and dealers in securities, could use rating as an input for their monitoring of risk exposures. The merchant bankers are also using credit ratings for pre-packing of issues by way of securitization/ structured obligations. Highly rated instruments put the brokers at an advantage to make less effort in studying the company's credit position to convince their clients to select an investment proposal. This enables brokers and other financial intermediaries to save time, energy, costs and manpower in convincing their clients about investment in any particular instrument.
Disadvantages of credit rating
(1) Biased rating and misrepresentations In the absence of quality rating, credit rating is a curse for the capital market industry, carrying out detailed analysis of the company, should have no links with the company or the persons interested in the company so that their reports impartial and judicious recommendations for rating committee. The companies having lower grade rating do not advertise or use the rating while raising funds from the public. In such cases, the investor cannot get information about the riskiness of instrument and hence is at loss.
(2) Static study Rating is done on the present and the past historic data of the company and this is only a static study. Prediction of the company's health through rating is momentary and anything can happen after assignment of rating symbols to the company. Dependence for future results on the rating, therefore defeats the very purpose of
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risk inductiveness of rating. Many changes take place in economic environment, political
situation, government policy framework, which directly affects the working of a company.
(3) Concealment of material information Rating company might conceal material information from the investigating team of the credit rating company. In such cases, quality of rating suffers and renders the rating unreliable.
(4) Rating is no guarantee for soundness of company Rating is done for a particular instrument to assess the credit risk but it should not be construed as a certificate for the matching quality of the company or its management. Independent views should be formed by the public using the rating symbol.
(5) Human bias Findings of the investigation team, at times, may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating.
(6) Reflection of temporary adverse conditions Time factor affects rating. Sometimes, misleading conclusions are derived. For example, company in a particular industry might be temporarily in adverse condition but it is given a low rating. This adversely affects the company's interest (7) Down grade Once a company has been rated and if it is not able to maintain its working results and performance, credit rating agencies would review the grade and down grade the rating resulting into impairing the image of the company.
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(8) Difference in rating of two agencies Rating done by the two different credit rating agencies for the same instrument of the same issuer company in many cases would not be identical. Such differences are likely to occur because of value judgment differences on qualitative aspects of the analysis in two different agencies.
(9) Conservative Rating Default by an investment-grade firm is seen as the most costly error for the agency. In order to preserve their reputation by avoiding the failure of any investment-grade firm, rating agencies downgrade even "good" firms in response to higher global risk. The downgrades may look self-fulfilling, but in fact, investors rationally ignore them, as they actually convey no information about the relative quality of firms.
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CHAPTER 5 TYPES OF RATINGS
Following are the different kinds of rating:
(1) Bond/debenture rating Rating the short term and medium term debentures/bonds issued by corporate, government etc. is called debenture or bond rating.
(2) Equity rating Rating of equity shares issued by a company is called equity rating. An evaluation of a stock's expected performance and/or its risk level as judged by a
rating agency such as Standard and Poor's. A stock rating will usually help the investor to find out fair value for the stock, based on an objective evaluation of the company. The greater the amount by which the fair value exceeds the market value, the more highly recommended a buy the stock is. Conversely, if the market value of the stock exceeds the fair value of the stock, then analysts recommend that the stock be sold. Most stock rating systems give stocks 1 to 5 stars, with 5 being the best.
(3) Preference share rating Rating of preference share issued by a company is called preference share rating.
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(4) Commercial paper rating Commercial papers are instruments used for short-term borrowing. Commercial papers are issued by manufacturing companies, finance companies, banks and financial institutions and rating of these instruments is called commercial paper rating.
(5) Fixed deposits rating Fixed deposits programmers are medium term unsecured borrowings. Rating of such programmes is called as fixed deposits rating.
(6) Borrowers rating Rating of borrowers is referred as borrower rating.
(7) Individuals rating Rating of individuals is called as individual's credit rating.
(8) Structured obligation Structured obligations are also debt obligations and are different from debenture or bond or fixed deposit programmes and commercial papers. Structured obligation is generally asset-backed security. Credit rating agencies assessed the risk associated with the transaction with the main trust on cash flows emerging from the asset would be sufficient to meet committed payments, to the investors in worst case scenario.
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(9) Sovereign rating Is a rating of a country, which is being considered whenever a loan is to be extended, or some major investment is envisaged in a country. It is a grading of a country's ability to meet its financial obligations. Credit rating
agencies provide these ratings and investors use this to assess the level of risk related with investing in a country. The rating may also include an evaluation of a
country's political risk. For example, India has been given BBB negative rating by Standard and poor’s as on April 2012.
Because it is the doorway into a country's investment atmosphere, the sovereign rating is the first thing most institutional investors will look at when making a decision to invest money abroad. This rating gives the investor an immediate understanding of the level of risk associated with investing in the country. A country with a sovereign rating will therefore get more attention than one without. So to attract foreign money, most countries will strive to obtain a sovereign rating and they will strive even more so to reach investment grade. In most circumstances, a country's sovereign credit rating of AAA indicates lowest risk.
(10) Rating of real estate CRISIL has started assigning rating to the builders and developers with the objective of helping and guiding prospective real estate buyers. CRISIL thoroughly scrutinizes the sale deed papers, sanctioned plan; lawyers report government clearance certificates before assigning rating to the builder or developer. Past experience of the builder, number of properties built by the builder, financial strength, and time taken for completion are some of the factors taken into consideration by the CRISIL before giving a final rating to the real estate builder developer.
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(11) Bank ratings CRISIL and ICRA both are engaged in rating of banks based on the following six parameters also called CAMELS. C - C stands for capital adequacy of banks. A bank needs to maintain at least 10 % capital against risky assets of the bank. A - A stands for asset quality. The loan is examined to determine non-performing assets. An asset/loan is considered non-performing asset where either interest or principal is unpaid for two quarters or more. Ratios like NPA to Net Advances, Adequacy of Provision & Debt Service Coverage Ratio are also calculated to know exact picture of quality of asset of a bank. M - M stands for management evaluation. Here, the efficiency and effectiveness of management in framing plans and policies is examined. Ratios like ROI, Return on Capital Employed (ROCE), and Return on Assets (ROA) are calculated to comment upon bank’s efficiency to utilize the assets. L - L indicates liquidity position. Liquid and current ratios are determined to find out banks ability to meet its short-term claims. S - S stands for Systems and Control studied to determine their adequacy and efficiency.
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CHAPTER 6 ROLES AND OPRATIONS OF CREDIT RATING AGENCIES: CRISIL, ICRA and CARE
CRISIL (Credit Rating Information Services of India Limited) Particular Incorporated in Promoted By 1987 Industrial Credit and Investment Corporation of India Ltd. (ICICI) and Unit Trust of India ICRA (Investment Information and Credit Rating Agency of India Ltd.) 1991 Industrial Finance Corporation of Ind ia(26%), and UTI, LIC, GIC, PNB, Central Bank of India, Bank of Baroda, Uco Bank etc. (74%) New Delhi CARE (Credit Analysis and Research Ltd.)
1993 IDBI Jointly with investment institutions, banks and finance companies
Registered Office Rating Process
Mumbai
Mumbai
1. Request of the company 2. Assignment to Analytical team 3. Obtaining and processing of data 4. Finding presentation 5. Communication of decision 6. Monitoring of change of rating
1. Rating request 2. Rating team 3. Information requirement 4. Secondary information 5. Management meeting and plant visits 6. Preview Meeting 7. Rating Committee meeting 8. Rating communication 9. Rating reviews 10. Surveillance
1. Client request and submission of information 2. Analyze information 3. Team undertakes site 4. Form Internal Committee for preview analyses 5. Assign Rating 6. Review of rating assign
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Long Term (Rating Symbols for Debentures)
1. AAA – Highest Safety 2. AA – High Safety 3. A – Adequate Safety 4. BBB – Moderate Safety 5. BB – Inadequate Safety 6. B – High Risk 7. C – Substantial Risk 8. D – Default
1. LAAA : Highest Safety 2. LAA+, LAA, LAA: High Safety 3. LA+, LA, LA- : Adequate Safety 4. LBBB+, LBBB, LBBB- : Moderate Safety 5. LBB+, LB, LB- : Risk Prone 6. LC+, LC, LC- : Substantially Risk 7. LD : Extremely speculative
1. CARE AAA : Highest Safety 2. CARE AA : High Safety 3. CARE A : Adequate Safety 4. CARE BBB : Moderate Safety 5. CARE BB : High Risk 6. CARE B : Substantially Risk 7. CARE C : Extremely High Risk 8. CARE D : Likely to be default soon 1. CARE 1 : Excellent Safe 2. CARE 2 : Very Well Safe 3. CARE 3 : Adequate Safety 4. CARE 4 : Favorable Safe 5. CARE 5 : Default
Medium Term (Fixed Deposit)
1. FAAA : Highest Safety 2. FAA : Adequate Safety 3. FA : Safety 4. FB : Inadequate Safety 5. FC : High Risk 6. FD : Default
Short Term (Commercial Paper)
1. P1 : Very Strong Safety 2. P2 : Strong Safety 3. P3 : Adequate Safety 4. P4 : Favorable 5. P5 : Default
1. MAAA : Highest Safety 2. MAA+, MAA, MAA- : High Safety 3. MA+, MA, MA- : Adequate Safety 4. MB+, MB, MB- : Inadequate Safety 5. MC+, MC, MC- : Risk Prone 6. MD : Default 1. A1+, A1 : Highest Safety 2. A2+, A2 : High Safety 3. A3+, A3 : Adequate Safety 4. A4+, A4 : Risk Prone 5. A5 : Default
1. PR1 : High Rate of Return 2. PR2 : Strong Capacity for repayment 3. PR3 : Adequate capacity for Re 4. PR4 : Minimal Degree of Safety 5. PR5 : Likely to be default
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CHAPTER 7 CREDIT RATING PROCESS OF DEBT INSTRUMENT: HDFC
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About HDFC
? Housing Development Finance Corporation Limited (HDFC Ltd.) was established in 1977 with the primary objective of meeting a social need of encouraging home ownership by providing long-term finance to households thereby being pioneer and leader in housing finance in India. It has a network of 318 outlets (including subsidiary distribution company) covering over 2400towns and cities. ? Individual housing loans constituted 66 per cent of HDFCs loan book as on March 31, 2012 and 67 per cent as on June 30, 2012. As on June 30, 2012, rental discount constituted 7 per cent of the portfolio, while corporate loans and construction finance constituted 13 per cent each. Loans against property and promoter funding currently constitute less than 5 per cent of the portfolio. ? ? HDFC’s primary sourcing partner is its subsidiary, HDFC Sales Pvt Ltd, which accounts for 47 percent of its origination. In addition, HDFC Bank sources housing loans for HDFC for a fee: in 201112, 28 per cent of HDFC’s individual loans disbursed were sourced through HDFC Bank. HDFC retains control over credit, legal, and technical appraisals of all loans, as per its agreement with HDFC Bank. HDFC can sell back up to 55 per cent of these loans to HDFC Bank under the mortgage-backed securities and loan assignment route. ? In 2011-12, HDFC sold Rs.49.8 billion of individual loans to HDFC Bank under the assignment route. Both companies benefit from this arrangement. While HDFC earns a fee income from HDFC Bank for administering and servicing loans, HDFC Bank obtains high-quality assets based on HDFC’s proven evaluation capabilities
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Instruments rated
? ? ? ? ? ? Rs.300.0 Billion Non-Convertible Debentures- CRISIL AAA/Stable Non Convertible Debentures aggregating Rs.844.93 Billion- CRISIL AAA/Stable Bonds Aggregating Rs.1.0085 Billion- CRISIL AAA/Stable Subordinate Bond Aggregating Rs.38.75 Billion- CRISIL AAA/Stable Rs.150 Billion Short Term Debt- CRISIL A1+ Fixed Deposits- FAAA/Stable
Different Rating of Products of Various Banks
?
HDFC Bank Products CARE PR1+ CARE AAA CARE AAA(FD) CARE AAA Fitch Rating India Pvt Ltd tAAA AAA AAA AAA
HDFC Bank Certificate of Deposit HDFC Bonds HDFC Fixed Deposit HDFC Mutual Fund Top 200
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?
ICICI Bank Products CRISIL AAA P1 FAAA P1
ICICI 7.8% Debentures ICICI Bank Certificate of Deposit ICICI Bank Fixed Deposit ICICI Commercial Paper
?
Central Bank of India Products CRISIL AAA FAAA P1
Central Bank of India 9% Debentures Central Bank of India Fixed Deposit Central Bank of India Certificate of Deposit
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Rating Rationale
1. Leading market position and strong track record in housing finance ? HDFC has a track record of more than 35 years of profitable growth in the individual and corporate housing finance segments. ? HDFC has maintained its position as one of the top players in the housing finance business in India, with mortgage loans registering a compound annual growth rate (CAGR) of 18 per cent (excluding loans sold) over the past five years. ? In 2011-12 HDFC disbursed Rs.711.1 billion—a growth of 18 per cent over the previous year. ? Loan approvals grew by 20 per cent in 2011-12. For the quarter ended June 30, 2012, loan approvals grew by 17 per cent and loan disbursements grew by 20 per cent as compared to the corresponding quarter in the previous year.
2. Strong Asset quality ? HDFC has a strong asset quality, backed by strong risk management systems and efficient credit approval mechanisms. ? As on March 31, 2012, the company had low gross non-performing loans (NPLs), accounting for 0.74 per cent of its total loan portfolio, as against 0.77 per cent the previous year. ? HDFC has nil net NPAs. As on June 30, 2012, gross NPLs were 0.79 per cent of the portfolio.
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3. Well-diversified and stable resource base
? HDFC has a well-diversified and stable resource base, comprising fixed deposits, bank borrowings, debentures, bonds, and foreign currency borrowings. ? This lends flexibility to the company’s borrowings, allowing it to manage borrowing costs. ? HDFC’s cost of borrowings increased to 8.8 per cent (on a yearly average basis) in 2011-12 from 7.1 percent in 2010-11. This is in line with industry trends.
4. Healthy capitalization and profitability ? HDFC has a comfortable financial risk profile, underpinned by robust capitalization and healthy profitability. ? As on March 31, 2012, HDFC had a large net worth of Rs.190.2 billion. ? The company reported an overall Capital adequacy ratio CAR of 14.6 per cent as on the same date. ? HDFC and its wholly owned subsidiaries, HDFC Investments Ltd and HDFC Holdings Ltd, currently hold 23.1 per cent stake in HDFC Bank. ? HDFC’s net worth remains comfortable even when adjusted for such strategic investments. CRISIL believes that HDFC’s capitalization will remain healthy over the medium term, given the company’s strong internal accruals. ? HDFC’s consistently robust asset quality is also expected to support its capitalization. Additional requirements for capital infusion in subsidiaries have also reduced. ? HDFC’s earnings profile is marked by healthy interest spreads, low expense levels, and good return on net worth (RoNW). ? The company maintained a healthy interest spread on loans over cost of borrowings in the range of 2.15 to 2.35 per cent over the past four years, reporting an interest spread of 2.27 per cent in 2011-12. ? Its profit after tax of Rs.41.2 billion in 2011-12 translated into a RoNW of 22.7%.
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? HDFC’s earnings profile is marked by an adequate net profitability margin (NPM) of 2.1 per cent (post credit costs) in 2011-12. ? There was some contraction in gross spread during 2011-12 given the higher borrowing costs. However, 84 per cent of HDFC’s assets and 75 per cent of liabilities were on a floating rate basis, which allows it to manage interest spreads. ? Additionally, on April 1, 2012, approximately Rs.216.0 billion of the dual rate loans have converted to floating rate loans which is expected to result in higher yields on this portfolio, thus improving spreads. ? CRISIL believes that HDFC will maintain a stable, above-average earnings profile over the medium term.
Conclusion
CRISIL believes that Housing Development Finance Corporation Ltd (HDFC) will maintain a stable credit risk profile over the medium term on the back of its strong asset quality, and healthy capitalization and profitability. CRISIL also believes that HDFC’s strong franchise and fundamentals will enable the company to maintain its competitive position, supporting its current ratings. The outlook may be revised to ‘Negative’ if HDFC’s asset quality or profitability weakens significantly.
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CHAPTER 8 CREDIT RATING PROCESS FOR IPO: CASE STUDY OF COAL INDIA LTD.
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IPO GRADING IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. It was started in the year 2006.Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below. IPO grade 1: Poor fundamentals IPO grade 2: Below-average fundamentals IPO grade 3: Average fundamentals IPO grade 4: Above-average fundamentals IPO grade 5: Strong fundamentals IPO grading has been introduced as a process to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO. A company which has filed the draft offer document for its IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO from at least one Credit rating agencies. IPO Grading is intended to provide the investor with an informed and objective opinion expressed by a professional rating agency after analyzing factors like business and financial prospects, management quality and corporate governance practices etc. However, irrespective of the grade obtained by the issuer, the investor needs to make his/her own independent decision regarding investing in any issue after studying the contents of the prospectus including risk factors carefully.
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IPO grades cannot be rejected irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP Guidelines. However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.
CASE STUDY OF COAL INDIA LTD
India is currently among the top three fastest growing economies of the world. As natural corollary India's energy needs too are fast expanding with its increased industrialization and capacity addition in Power generation. This is where 'Coal' steps in. In India coal is the critical input for major infrastructure industries like Power, Steel and Cement.
? ?
Coal is the most dominant energy source in India's energy scenario. Coal meets around 52% of primary commercial energy needs in India against 29% the world over.
? ?
Around 66% of India's power generation is coal based. India is the 3rd largest coal producing country in the world after China and USA.
About COAL INDIA LTD Government of India-owned Coal India produces and sells coal in the country. It is the largest coal reserve holder in the world. It is also the largest producer of coal in the world. In FY10, it produced 431 mn tones of coal which accounted for 81% of the coal production in India.
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The company owns and operates 471 coal mines - 163 are open cast, 273 are underground and the rest are mixed. Coal production is carried out by the seven subsidiaries of the company; namely
? ? ? ? ? ? ?
Bharat Coking Coal Limited (BCCL)(Dhanbad, Jharkhand) Central Coalfields Limited (CCL)(Ranchi, Jharkhand) Western Coalfields Limited (WCL)(Nagpur region) Eastern Coalfields Limited (ECL)(Sanctoria, Asansol, West Bengal) Central Mine Planning and Design Institute Limited (CMPDIL)(Ranchi, Jharkhand) South Eastern Coalfields Limited (SECL)(Bilaspur) Northern Coalfields Limited, Singrauli (NCL,Singrauli)
Two of them - Mahanadi Coalfields and South Eastern Coalfields - together contribute 50% of the company’s production. Another subsidiary – Central mine planning and design institute CMPDIL – carries out mine exploration and development works for the coal-producing subsidiaries. Coal India has a dominant position (81% market share) in the Indian coal industry, catering to 53% of the country’s energy requirement. The demand for coal is expected to increase at an annual rate of 11.2% over the next four years on the back of increase in thermal power plants being set up in the country. Coal India enjoys cost competitive advantage over international players since nearly 90% of its production is from open cast mines and have low stripping ratios. As a result, the notified prices of Coal India are significantly lower than imported coal prices adjusted for calorific value. The grade also takes into account the de-controlled pricing regime and Coal India’s ability to increase coal prices in the past. This grade indicates that the fundamentals of the IPO are strong relative to the other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The offer price for the issue may be higher or lower than the level justified by its fundamentals.
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The grade is not a recommendation to buy, sell or hold the graded instrument, its future market price or suitability for a particular investor. To arrive at the overall grade, amongst various other parameters, CRISIL has considered the company’s business prospects, its financial performance, management capabilities and corporate governance practices. DETAILED GRADING PARAMETERS 1. BUSINESS PROSPECTS
(A) Strong growth in domestic demand for coal, but supply growth lagging ? Coal is the primary source of energy, accounting for nearly 53% of the total energy consumption in India ? Since India has huge coal resources (276 bn tones as of March 2010), the Integrated Energy Policy 2006 expects coal to remain the prime source of energy, accounting for 50% of the primary commercial energy requirement of India ? CRISIL Research expects the demand for coal in India to grow at 11.2% CAGR to 933 MT (million tons) in FY14. ? Under the Eleventh Five-Year Plan, India plans to add power generation capacity of 78 GW. Nearly 67% of this capacity is coal-based, indicating that the demand for coal would primarily come from the power sector ? The demand for non-coking coal is expected to grow at CAGR of 11.3% whereas that for coking coal is expected to grow at 9.7% CAGR over FY09-14 (CRISIL Research estimates). ? The overall domestic production is, however, estimated to grow at 7.2% CAGR over FY09-14 to 672 MT resulting in an acute shortage of coal in the domestic market ? CRISIL Research expects imports of coal to treble to 180 MT in FY14 from 59 MT in FY10 to meet the shortage
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(B) Largest producer of coal in the world, dominant position in India ? Coal India is the largest producer of coal in the world. It owns 48% of India’s proven reserves and contributes over 81% of the total coal production in India. ? Given India’s abundant coal reserves and the absence of other sustainable fuel sources, the company plays a strategic role in meeting India’s energy requirements. ? CRISIL Research estimates Coal India to contribute 80% of the Indian coal production in FY12 and, thus, maintain its dominant position. ? Nearly 90% of the company’s production is from open cast mines. Moreover most of these open cast mines have low stripping ratios, which provide the company with a significant cost advantage. (C)Established capabilities of mine exploration, development and operations ? Coal India has developed strong skills for exploration, development and production from coal mines. ? The company’s wholly-owned subsidiary Central Mine Planning and Design Institute Limited (CMPDIL) carries out exploration, mine development and design work for Coal India. ? CMPDIL has explored over 500 coal projects and has been able to prove 80 bn tones of coal reserves. It has carried out planning for open cast mines for capacity up to 25 MTPA and depth of 480 meters, and underground mines for capacity up to 3.5 MTPA and depth of 600 meters. ? The company is currently operating 163 open cast and 273 underground mines. The capabilities have helped the company grow its production at a CAGR of 5.2% from 260 MT in FY00 to 431 MT in FY10.
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(D)Deregulation of pricing - Coal India increases prices to cover rise in production costs ? The company supplies coal to its customers through Fuel Supply Agreement (FSA) at prices which it notifies from time to time. As a result of the deregulation of coal pricing in India, Coal India is able to increase its notified prices to cover any rise in production, thereby protecting its profitability. ? The dominant position of the company helps it to pass on the rise in production and transportation costs, and changes in statutory levies to its customers. ? The company has announced four price increases since FY00; the average price has increased at 4.9% CAGR over FY00-10. ? However, the notified prices of the company are still significantly below the international prices, giving it a competitive advantage.
(E)Shift in sales mix towards market-linked pricing ? Apart from the sale of coal under FSA at notified prices, the company supplies certain portion of its production at market-linked prices through E-Auctions and specific MoUs. Under E-Auction, the company sells around 10% of its production at market-determined rates. ? It also sells certain quantity of higher grade non-coking coal (A, B, C grades) and beneficiated coal through specific MoUs with its customers at prices which are 15% below the import parity prices for similar grade coal. ? The company plans to set up 20 coal beneficiation facilities with a capacity of 111 MT; they are expected to come on stream by FY17.
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(F)New projects and utilization of cash to drive growth ? The company has identified 45 coal mining projects which are under various stages of planning and development for implementation in Eleventh and Twelfth five-year plans. Of these, 25 projects with estimated production of 47.51 MTPA and Capex requirement of Rs 33.9 bn are expected to become operational by endFY12. ? Whereas 20 projects with estimated production of 33.27 MTPA and Capex requirement of Rs 25.8 bn would become operational during the Twelfth FiveYear Plan. ? Additionally, the company intends to develop 20 coal beneficiation facilities with a capacity of 111 MTPA at a capex of Rs 23.3 bn, which would come on stream between FY14 and FY17. ? The company has a strong cash balance of Rs 390 bn as of FY10.
(G)New projects and utilization of cash to drive growth ? The company has identified 45 coal mining projects which are under various stages of planning and development for implementation in Eleventh and Twelfth five-year plans. Of these, 25 projects with estimated production of 47.51 MTPA and Capex requirement of Rs 33.9 bn are expected to become operational by endFY12. ? Whereas 20 projects with estimated production of 33.27 MTPA and Capex requirement of Rs 25.8 bn would become operational during the Twelfth FiveYear Plan. ? Additionally, the company intends to develop 20 coal beneficiation facilities with a capacity of 111 MTPA at a capex of Rs 23.3 bn, which would come on stream between FY14 and FY17.
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? The company has a strong cash balance of Rs 390 bn as of FY10. Utilization of this cash for mining projects and overseas acquisitions planned by the company would drive the ….33. ? 33 company’s growth going ahead. (H)Delay in regulatory approvals a key hurdle to production ? The coal sector in India is riddled with delays in securing regulatory approvals, especially for forest clearances. ? Forest clearances take between three and eight years, which could affect the growth plans of the company.
2. FINANCIAL PERFORMANCE PARTICULARS FY 09 ACTUAL Operating income EBITDA margins Net profits RONW Basic EPS Diluted EPS No. of equity shares Net worth Rs mn 341,875 % 19.5 FY 10 ACTUAL 410,175 15.7 40,628 21.4% 6.4 6.4 6,316 190,081 30.1 FY 11 ACTUAL 466,703 27.6 98,294 38.0% 15.6 15.6 6,316 258,437 40.9
Rs mn 42,850 % Rs Rs Mn 24.9% 6.8 6.8. 6,316
Rs mn 172,007 27.2
Book value (FV Rs Rs 10) Current ratio Times
1.21
1.20
1.34
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? Coal India’s revenues grew at a two-year CAGR of 17.0% to Rs 467 billion in FY11 primarily on account of 5.5%CAGR in sales volumes and 10.8% CAGR in average realization over FY08-11 due to increase in notified prices and sale of coal under market-linked prices through E-Auction and MoUs. ? The company’s EBITDA margins dipped to 15.7% in FY10 as a result of increase in employee costs. ? The upward revision in wages and the executive pay revision led to a 51.7% increase in overall employee cost in FY11. The EPS of the company grew at a two-year CAGR of 51% to Rs 15.6 in FY09. ? The RoE increased to 38.0% in FY09, in line with higher profitability. As on FY11, the company has cash and bank balance of Rs 390 bn and net worth of Rs 258 bn. ? Since this is an offer for sale by GOI, the company would not receive any proceeds from the IPO and there would be no change in equity of the company.
3. Management Capabilities and Corporate Governance ? Coal India’s top management is well qualified and highly experienced. Most of the directors started their careers with the company. The senior management has been instrumental in making the shift towards market-linked pricing for coal and in turning around the loss-making subsidiaries like Eastern Coalfields Limited and Bharat Coking Coal Limited. ? However, the management has been unable to deploy the huge cash balance with the company. Ability of the management to deploy the surplus cash in productive assets would have a bearing on its future return on equity. ? Coal India was accorded the ‘Navratna’ status in 2008, which has given it autonomy in functioning. Moreover, six of its nine subsidiaries have won the ‘mini-Navratna’ status which entails quicker decisions at the subsidiary level. ? Po0st IPO process, the shareholding pattern of the company was 90% of the stake been retained by the GOI. And remaining 10% by the public.
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Correlation between Revenue and Earnings per Share of the COAL India Ltd. In business, revenue or turnover is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Earnings per share (EPS) are the amount of earnings per each outstanding share of a company's stock. Hereby I try to find the relationship between Revenue and Earnings Per share.
Hypothesis: Ho: There is no relationship between Revenue and Earnings Per Share of COAL India Ltd H1: There is relationship between Revenue and Earnings per Share
Chart:
Years Mar'08 Mar'09 Mar'10 Mar'11 Mar'12 Interpretation:
Revenue 3490.55 4610.49 4760.69 5544.59 9500.51
EPS 388.48 5.22 5.98 7.48 12.77
=CORROL (3490.55, 4610.49, 4760.69, 5544.59, 9500.51:388.48, 5.22, 5.98, 7.48, 12.77) Answer: 0.491001123 – Moderate Relationship
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As we can see revenue of COAL India is rise day by day the Earning per share of the company also increase gradually. Shareholders earn good earnings on their investment. But as company done progress Earning per share of company does not rise proportionally. From the above observation H1 hypothesis is accepted as there is moderate relationship between Revenue and Earnings Per Share, If the answer of the correlation is between 0.1- 0.2 which mean there is weak relationship between our variable, if answer of the correlation is between 0.3-0.7 which mean there is moderate relationship between our variable, and if answer of the correlation is between 0.7-1.0 which mean there is strong relationship between our variable. For proving above observation Balance Sheet, Profit and Loss Account and Ratio Analysis of the COAL INDIA LTD.
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Balance Sheet of Coal India Mar '12 Mar '11 ------------------- in Rs. Cr. ------------------Mar '10 Mar '09 Mar '08
12 mths
12 mths
12 mths
12 mths
12 mths
Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 6,316.36 6,316.36 0.00 0.00 13,248.39 0.00 19,564.75 0.00 1,173.54 1,173.54 20,738.29 Mar '12 6,316.36 6,316.36 0.00 0.00 13,121.02 0.00 19,437.38 0.00 1,370.43 1,370.43 20,807.81 Mar '11 6,316.36 6,316.36 0.00 0.00 10,744.36 0.00 17,060.72 0.00 1,464.30 1,464.30 18,525.02 Mar '10 6,316.36 6,316.36 0.00 0.00 8,920.86 0.00 15,237.22 0.00 1,786.62 1,786.62 17,023.84 Mar '09 6,316.36 6,316.36 0.00 0.00 7,052.93 0.00 13,369.29 0.00 1,510.83 1,510.83 14,880.12 Mar '08
12 mths
12 mths
12 mths
12 mths
12 mths
Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress 408.98 295.42 113.56 60.75 387.46 289.13 98.33 55.67 376.63 283.23 93.40 17.84 368.92 273.95 94.97 5.99 355.30 266.60 88.70 1.07
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Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets 6,541.19 18.51 0.01 15,302.72 15,321.24 8,675.46 0.00 23,996.70 0.00 8,529.27 1,444.64 9,973.91 14,022.79 0.00 20,738.29 6,319.17 35.70 0.00 373.37 409.07 9,484.74 11,286.14 21,179.95 0.00 5,837.37 1,007.95 6,845.32 14,334.63 0.00 20,807.80 6,316.57 26.59 0.00 217.27 243.86 8,380.19 8,916.10 17,540.15 0.00 4,763.78 679.14 5,442.92 12,097.23 0.00 18,525.04 6,316.36 19.52 0.02 139.00 158.54 9,354.33 6,323.76 15,836.63 0.00 4,521.26 708.85 5,230.11 10,606.52 0.00 17,023.84 6,316.36 10.44 0.00 92.60 103.04 8,635.55 4,571.36 13,309.95 0.00 4,363.30 472.65 4,835.95 8,474.00 0.00 14,880.13
Contingent Liabilities Book Value (Rs)
312.15 30.97
289.93 30.77
164.74 27.01
190.86 24.12
0.00 2,116.61
Source : Dion Global Solutions Limited
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Profit & Loss account of Coal India Mar '12 ------------------- in Rs. Cr. ------------------Mar '11 Mar '10 Mar '09 Mar '08
12 mths
12 mths
12 mths
12 mths
12 mths
Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses 3.74 5.45 345.34 52.34 9.48 98.98 0.00 515.33 Mar '12 8.57 6.92 237.71 39.01 239.57 63.99 0.00 595.77 Mar '11 6.06 5.93 240.91 29.66 155.41 61.84 0.00 499.81 Mar '10 7.64 8.48 282.10 21.21 110.09 47.52 0.00 477.04 Mar '09 7.73 9.00 164.00 21.50 175.86 22.28 0.00 400.37 Mar '08 486.56 70.70 415.86 9,101.71 -17.06 9,500.51 468.81 7.50 461.31 5,074.74 8.54 5,544.59 449.21 1.07 448.14 4,305.88 6.67 4,760.69 318.89 0.84 318.05 4,284.11 8.33 4,610.49 273.01 1.20 271.81 3,231.93 -13.19 3,490.55
12 mths 12 mths 12 mths 12 mths 12 mths
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Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualized) 63,163.6 4 12.77 100.00 30.97 -116.53 8,985.18 378.73 8,606.45 6.96 0.00 8,599.49 -84.39 8,515.10 450.00 8,065.10 511.59 0.00 6,316.36 0.00 -125.92 4,948.82 222.89 4,725.93 5.57 0.00 4,720.36 165.72 4,886.08 190.00 4,723.56 587.18 0.00 2,463.38 0.00 -45.00 4,260.88 386.46 3,874.42 8.99 0.00 3,865.43 114.65 3,980.08 200.00 3,779.92 493.75 0.00 2,210.00 0.00 -150.66 4,133.45 475.30 3,658.15 6.17 0.00 3,651.98 -192.35 3,459.63 162.85 3,295.38 469.39 0.00 1,705.42 0.00 -141.75 3,090.18 448.30 2,641.88 6.50 0.00 2,635.38 -60.77 2,574.61 120.81 2,453.80 392.64 0.00 1,705.42 289.84
Shares in issue (lakhs) Earnings Per Share (Rs) Equity Dividend (%) Book Value (Rs)
63,163.64 7.48 39.00 30.77
63,163.64 5.98 35.00 27.01
63,163.64 5.22 27.00 24.12
631.64 388.48 27.00 2,116.61
Source : Dion Global Solutions Limited
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Key Financial Ratios of Coal India
Mar '12
Mar '11
Mar '10
Mar '09
Mar '08
Investment Valuation Ratios Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Operating Profit Margin (%) Profit Before Interest And Tax Margin (%) Gross Profit Margin (%) Cash Profit Margin (%) Adjusted Cash Margin (%) Net Profit Margin (%) Adjusted Net Profit Margin (%) Return On Capital Employed (%) Return On Net Worth (%) Adjusted Return on Net Worth (%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Return on Long Term Funds (%) -28.02 -1.29 -29.69 85.69 85.69 84.73 84.73 43.29 41.22 41.65 30.97 30.97 43.29 -19.20 -1.70 -20.41 82.60 82.60 85.35 85.35 23.92 24.30 23.48 30.77 30.77 23.92 -10.08 -1.14 -12.08 77.26 77.26 79.59 79.59 22.92 22.15 21.45 27.01 27.01 22.92 -47.81 -3.44 -49.75 75.86 75.86 71.76 71.76 24.17 21.62 22.82 24.12 24.12 24.17 -52.15 -4.30 -54.54 71.46 71.46 71.24 71.24 20.32 18.35 18.36 2,116.61 2,116.61 20.32 10.00 10.00 -0.18 0.66 --10.00 3.90 -0.14 0.73 16.48 -10.00 3.50 -0.07 0.71 12.99 -10.00 2.70 -0.24 0.50 10.57 -1,000.00 270.00 -22.44 43.03 806.02 --
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Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital Profit & Loss Account Ratios Material Cost Composition Imported Composition of Raw Materials Consumed Selling Distribution Cost Composition Expenses as Composition of Total Sales 0.89 1.85 1.35 2.40 2.84 26.29 64,474.42 26.29 1.17 0.02 0.02 --12,139.19 14.33 297,621.55 14.33 1.19 0.02 0.02 -16.29 11,186.47 18.58 43,934.94 18.58 1.19 0.02 0.03 -10.91 9,718.02 18.22 29.77 23.71 0.06 23.72 22.31 24.48 0.07 22.36 22.22 11.59 0.09 11.01 10.80 9.11 0.12 8.67 7.95 7.06 0.11 6.76 6.49 2.41 2.40 0.06 0.06 3.09 3.09 0.07 0.07 3.22 3.22 0.09 0.09 3.03 3.02 0.12 0.12 2.75 2.75 0.11 0.11
15,745.09 36,484.40 18.22 0.86 0.02 0.02 -7.06 29.77 0.77 0.02 0.77 -3.99
12,005.47 11,223.47
--
--
--
--
--
-0.02
29.49 1.67
24.14 1.62
22.71 2.19
36.09 --
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Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio Adjusted Cash Flow Times 78.31 78.24 22.50 22.56 0.14 52.15 52.08 46.05 46.12 0.30 58.46 58.32 39.63 39.78 0.40 51.75 51.65 50.97 51.05 0.51 81.31 81.09 18.73 18.95 0.61
Mar '12
Mar '11
Mar '10
Mar '09
Mar '08
Earnings Per Share Book Value
12.77 30.97
7.48 30.77
5.98 27.01
5.22 24.12
388.48 2,116.61
Source : Dion Global Solutions Limited
Conclusion Coal India ltd is the only IPO which has a grade of 5/5 by all the three major credit rating agencies. CIL will continue to maintain its dominant market position in the domestic coal market and maintain its healthy cash accruals and surplus liquidity position over the medium term. The outlook may be revised to ‘Negative’ if the company’s market position deteriorates and profitability declines significantly due to adverse changes in India’s coal policy.
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Chapter 10 SEBI REGULATIONS: GENERAL OBLIGATIONS OF RATING AGENCIES
SEBI REGULATIONS
SECURITIES AND EXCHANGE BOARD OF INDIA (CREDIT RATING AGENCIES) REGULATIONS, 1999
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GENERAL OBLIGATIONS OF CREDIT RATING AGENCIES
Code of Conduct 13. Every credit rating agency shall abide by the Code of Conduct contained in the Third Schedule.
1. Agreement with the Client Every Credit Rating Agency shall enter into Written Agreement which contains i. ii. iii. iv. v. The rights and liabilities of each party The fee to be charged by the credit rating agency Agreement to a periodic review of the rating by the credit rating agency Agreement of co-operation with the credit rating agency Credit rating agency shall disclose to the client the rating assigned to the securities vi. Client shall agree to disclose the following documents a. The rating assigned to the client’s listed securities by any credit rating agency during the last three years b. Any rating given by any other credit rating agency, which has not been accepted by the client
2. Monitoring of rating
1. Every credit rating agency shall carry out periodic reviews of all published ratings during the lifetime of the securities. 2. If the client does not co - operate with the Credit Rating Agency so Credit Rating Agency shall carry out the review on the basis of the best information available.
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3. A credit rating agency shall not withdraw a rating so long as the obligations under the security rated by it are outstanding
2. Internal procedures to be framed.
Every Credit Rating Agency shall frame appropriate procedures and systems in order to prevent contravention of – (a) The Securities and Exchange Board of India (Insider Trading) Regulations, 1992; (b) The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995; and (c) Other laws relevant to trading of securities. 4. Disclosure of Rating Definitions and Rationale Every Credit Rating Agency: 1. Shall make public the definitions of the concerned rating, along with the symbol 2. Ratings do not constitute recommendations to buy, hold or sell any securities 3. Every credit rating agency shall make available to the general public information relating to the rationale of the ratings, which shall cover an analysis of the various factors justifying a favorable assessment, as well as factors constituting a risk. 5. Submission of Information to the Board Information called by Board from a Credit Rating Agency for the purpose of regulations, Credit Rating Agency shall furnish such information to the Board – a. Within a period specific by the Board or, b. If no such period specified by the Board, c. If no such period is specified then within a reasonable time.
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Every Credit Rating Agency shall, at the close of each accounting period, furnish to the Board copies of its Balance Sheet and Profit and Loss account.
6. Compliance with circulars etc., issued by the Board Every credit rating agency shall comply with such guidelines, directives, circulars and Instructions as may be issued by the Board from time to time, on the subject of credit rating. 7. Appointment of Compliance Officer 1. Every Credit Rating Agency shall appoint Compliance Officer who shall be responsible for monitoring rules and regulations and circulars issued by Board or the Central Government. 2. The compliance officer shall immediately and independently report to the Board any noncompliance observed by him. 8. Maintenance of Books of Accounts, records, etc. Every credit rating agency shall keep and maintain, for a minimum periods of five years the following books of accounts, records and documents, namely: (a) Copy of its balance sheet, as on the end of each accounting period; (b) A copy of its profit and loss account for each accounting period; (c) A copy of the auditor’s report on its accounts for each accounting period. (d) A copy of the agreement entered into, with each client; (e) Information supplied by each of the clients; (f) Correspondence with each client; (g) Ratings assigned to various securities including up gradation and down gradation (if any) of the ratings so assigned.
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9. Steps on Auditor’s Report Every credit rating agency shall, within two months from the date of the auditor’s report, take steps to rectify the deficiencies if any, made out in the auditor’s report, in so far as they relate to the activity of rating of securities 10. Confidentiality Every credit rating agency shall treat, as confidential, information supplied to it by the client and no credit rating agency shall disclose the same to any other person.
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CONCLUSION
Credit Rating is thus the need of the time since investors should be equipped with easy methods to make their investment decisions. If ratings are assigned in a proper, systematic, transparent way, then it will be a boon for investors and will go a long way in making the investment world a safe place. It is an undisputed fact that CRAs play a key role in financial markets by helping to reduce the informative gap between lenders and investors, on one side, and issuers on the other side, about the creditworthiness of companies (corporate risk) or countries (sovereign risk). An investment grade rating can put a security, company or country on the global radar, attracting foreign money and boosting a nation's economy. Indeed, for emerging market economies, the credit rating is the key to showing their worthiness of money from foreign investors. Credit rating helps the market regulators in promoting stability and efficiency in the securities market. Ratings make markets more efficient and transparent. Ratings are opinions on creditworthiness based on objective and subjective analysis. Rating agencies play an important role in the world markets, they can best serve markets when they operate independently, adopt and enforce internal guidelines to avoid conflict of interest, and provide confidential information from issuers.
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RECOMMENDATIONS
(A) For investors
?
Investors should not forget the Contract Law principle of ‘Caveat Emptor’. Caveat Emptor means ‘let the buyer beware’. It should be forgotten that everything including returns cannot be guaranteed and investments cannot be risk-free.
?
Investors should observe caution while investing their money and be aware themselves before taking their investment decisions. Investors should self study the facts and information available about the investment products and the creditability of the issuers, before zeroing on their decisions.
?
It is equally important for individual investors to maintain their good credit history by repaying loans on time and not breaching any rules of law in respect of investments, taxation, etc. that will go a long way in making the individual’s future secure and smooth.
?
Investors must understand that the objective of assessment for IPO Grading and Credit Rating are very different; though the basis elements of the analysis are same. IPO Grading assesses factors from equity-holder's perspective and is a point in time exercise, whereas Credit Rating assesses factors from debtholders perspective and usually requires recurring surveillance over the life of the instrument.
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(B) For credit rating agencies
?
CRISIL, ICRA & CARE, the three major rating agencies are handling 90%95% of the business of credit rating promoted by financial institutions who while advancing loans take the help of credit rating agencies to get the company rated. All these agencies have continued to expand their activities in recent years. They must also be updated about the reforms in the financial sector which can have a impact on the businesses of these agencies as the market is volatile in nature especially in case of debt instrument like bonds.
?
Another aspect is regarding the procedure or the methodology that these rating agencies follow for rating. Sometimes companies not satisfied with rating of one agency approach use another rating agency for better rating. For this purpose the rating process or procedure followed for rating must be relevant and accurate. Rating agencies should not only take into consideration past & present performance; the projected future performance must not be ignored.
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BIBLIOGRAPHY
? ? ? ? ? ? ? ? ? ? ? ? ?
Bharati V Pathak/2010/Indian financial system/ Pearson/Credit rating agencies in India/page 686 Lawrence J White/2001/The credit rating industry/An industrial organization analysis D. M. NACHANE and SAIBAL GHOSH/2004/Credit rating and bank behavior in India/the Singapore economic review Zvi Bodie, Alex kane, Alan J Marcus and Pitabas Mohanty/2009/Investments/Rating agencies/Mcgraw Hill http://www.sebi.gov.in/acts/CreditRatingAgencies http://www.sebi.gov.in/faq/ipo.html https://www.crisilresearch.com/Content/IPOs/CRISIL-Research_ipo-gradingrat_Coal-India CRISIL/Company Profile and Company Information/Provigator.com Crisil - Crisil India - Credit Rating Information Services of India Limited/Iloveindia.com. http://crisil.com/ratings/rating-process.html http://www.icra.in http://www.careratings.com http://www.coalindia.in
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doc_846636390.docx
PROJECT REPORT ON CREDIT RATING AGENCY IN INDIA
Submitted by: REEMA G. LIMBACHIA
BACHELOR OF COMMERCE BANKING & INSURANCE SEMESTER V MITHIBAI COLLEGE VILE PARLE (W) SUBMITTED TO UNIVERSITY OF MUMBAI ACADEMIC YEAR 2013 - 2014
NAME OF PROJECT GUIDE
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PROF.RIDDHI SHARMA
CERTIFICATE
I, Prof. Riddhi Sharma, hereby certify that REEMA G. LIMBACHIA of MITHIBAI COLLEGE OF TYBBI [Semester V] has completed the project CREDIT RATING AGENCY IN INDIA in the academic year 2013 - 14. The information submitted is true and original to my knowledge.
_______________________ Signature of Principal
_____________________ Project Guide (Prof. Riddhi Sharma)
_________________________
External Examiner
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College Seal
DECLARATION
I, REEMA G. LIMBACHIA OF MITHIBAI COLLEGE Of TYBBI [Semester V] hereby declare that I have compiled this project on CREDIT RATING AGENCY IN INDIA in the academic year 2013 - 14. The information submitted is true and original to the best of my knowledge.
DATE:
20/10/2013
PLACE: Mumbai
(REEMA G. LIMBACHIA) Roll No. - 21
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TYBBI
ACKNOWLEDGEMENT
I would like to thank Mithibai College & the faculty members of BBI for giving me an opportunity to prepare a project on "CREDIT RATING AGENCY IN INDIA ". It has truly been an invaluable learning experience. Completing a task is never one man's effort. It is often the result of invaluable contribution of number of individuals in direct or indirect way in shaping success and achieving it. I would like to thank principal of the college Dr. D.B. GADKARI and Co-coordinator Prof. NARESH SUKHANI for granting permission for this project. I would like to extend my sincere gratitude and appreciation to Prof. Riddhi Sharma who guided me in the study of this project. It has indeed been a great learning, experiencing and working under him during the course of the project. I would like to appreciate all my colleagues and family members who gave me support and backing and always came forward whenever a helping hand was needed. I would like to express my gratitude to all those who gave me the possibility to complete this thesis.
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EXECUTIVE SUMMARY
The banking sector in India underwent an unprecedented transformation in the 1990s with the emergence of a large number of private as well as foreign multinational banks entering the country increasing rapidly the number of banks in India due to the economic reforms. So the banking activities increased manifold and affected a large number of areas of operation of banks, particularly in the field of bank lending. Banks operate on the pattern of extending credit against security given by its customers associated with the bank. The facility of extending credit agencies are recognition of the changing times in which banks have to operate in a changing and ever evolving economic scenario. Growing needs and realization of higher rate of investments is giving birth to bank credit in India.
Credit rating agencies play an important role in assessing risk and its location and distribution in the financial system. By facilitating investment decisions they can help investors in achieving a balance in the risk return profile and at the same time assist firms in accessing capital at low cost. CRAs can thus potentially help to allocate capital efficiently across all sectors of the economy by pricing risk appropriately. However, in view of the fact that CRAs that rate capital market instruments are regulated by SEBI and that entities regulated by other regulators (IRDA, PFRDA and RBI) predominantly use the ratings, it was felt necessary to institute a comprehensive review of the registration, regulatory and supervisory regime for CRAs. The major motivation for the exercise was to look at inter regulatory coordination so that all interested stake holders have an institutional mechanism for providing inputs feed back to ensure realization of the objective behind the regulation of CRAs.
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RESEARCH METHODOLOGY
Objectives of the research:
To study Credit Rating Agencies in India
Secondary Data:
The secondary data has been collected from various reference books and websites which have been mentioned in the bibliography at the end of the project
Limitations of the Research:
Problems of selection of right information available from various sources
Scope of the Research:
The main objective of the project is to get to know about Credit Rating Agencies in India and importance from the investor’s point of view. Credit Rating is an objective assessment of a borrower’s credit quality in terms of business and financial risks.
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TABLE OF CONTENT
PAGE NO.
8 11 13 16 25 29
SR.NO
1 2 3 4 5 6 Introduction
PARTICULARS
Meaning and Definition Factors Affecting Assigned Ratings Functions, Benefits and Disadvantages Types of Ratings Roles and Operations of Credit Rating Agencies : CRISIL, ICRA and CARE Credit Rating Process of Fixed Income Instrument : HDFC Credit Rating Process for IPO: CASE STUDY OF COAL INDIA PVT. LTD. SEBI Regulations : General Obligations of Credit Rating Agencies Conclusion Recommendation Bibliography
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CHAPTER 1 Introduction of Credit Rating Agency
Evolution of Credit Rating Agencies
The origins of credit rating can be traced to the 1840's. Following the financial crisis of 1837, Louis Tappan established the first mercantile credit agency in New York in 1841. The agency rated the ability of merchants to pay their financial obligations. Robert Dun subsequently acquired it and its first rating guide was published in 1859. John Bradstreet set up another similar agency in 1849, which published a rating book in 1857. These two agencies were merged together to form Dun and Bradstreet in 1933, which became the owner of Moody's Investors Service in 1962. The history of Moody's itself goes back about 100 years. John Moody (1868 - 1958) was a self-taught reformer who had a strong entrepreneurial drive and a firm belief about the needs of the investment community - as well as considerable journalistic talent. Relying on his assessment of the market’s needs, John Moody and Company published Moody’s Manual of Industrial and Miscellaneous Securities in 1900, the company’s founding year. The manual provided information and statistics on stocks and bonds of financial institutions, government agencies, manufacturing, mining, utilities, and food companies. Within two months, the publication had sold out. By 1903, circulation had exploded, and Moody’s Manual was known from coast to coast.
When the stock market crashed in 1907, Moody’s company did not have adequate capital to survive, and he was forced to sell his manual business. Moody returned to the financial market in 1909 with a new idea.
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Instead of simply collecting information on the property, capitalization, and management of companies, he now offered investors an analysis of security values. His company would publish a book that analyzed the railroads and their outstanding securities. It offered concise conclusions about their relative investment quality. Moody had now entered the business of analyzing the stocks and bonds of America’s railroads, and with this endeavor, he became the first to rate public market securities. In 1909, Moody’s Analyses of Railroad Investments described for readers the analytic principles that Moody used to assess a railroad’s operations, management, and finance. The new manual quickly found a place in investors’ hands. In 1913, he expanded his base of analyzed companies, launching his evaluation of industrial companies and utilities. By that time, the "Moody's ratings" had become a factor in the bond market. On July 1, 1914, Moody's Investors Service was incorporated. That same year, Moody began expanding rating coverage to bonds issued by US cities and other municipalities.
Further expansion of the credit rating industry took place in 1916, when the Poor's Publishing Company published its first rating followed by the Standard Statistics Company in 1922, and Fitch Publishing Company in 1924. The Standard Statistics Company merged in 1941 to form Standard and Poor's, which was subsequently taken, over by McGraw Hill in 1966. For almost 50 years, since the setting up of Fitch Publishing in 1924, there were no major new entrants in the field of credit rating and then in the 1970s, a number of credit rating agencies commenced operations all over the world. These included the Canadian Bond Rating Service (1972), Thomson Bank watch (1974), Japanese Bond Rating Institute (1975), McCarthy Crisani and Maffei (1975 acquired by Duff and Phelps in 1991), Dominican Bond Rating Service (1997), IBCA Limited (1978), and Duff and Phelps Credit Rating Company (1980). There are credit rating agencies in operation in many other countries such as Malaysia, Philippines, Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia.
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In India, the Credit Rating and Information Services of India Ltd. (CRISIL) was set up as the first rating agency in 1987, followed by ICRA Ltd. (formerly known as Investment Information and Credit Rating Agency of India Limited) in 1991, and Credit Analysis and Research Ltd. (CARE) in 1994. The ownership pattern of all the three agencies is institutional.
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CHAPTER 2 CREDIT RATINGS: MEANING AND DEFINATION
Definitions of Credit Rating:
?A rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to 30 years or more. In addition, long term ratings incorporate an assessment of the expected monetary loss should a default occur." Moody’s
"Credit ratings help investors by providing an easily recognizable, simple tool that couples a possibly unknown issuer with an informative and meaningful symbol of credit quality." Standard and Poor’s
Ratings, usually expressed in alphabetical or alphanumeric symbols, are a simple and easily understood tool enabling the investor to differentiate between debt instruments based on their underlying credit quality. The credit rating is thus a symbolic indicator of the current opinion of the relative capability of the issuer to service its debt obligation in a timely fashion, with specific reference to the instrument being rated. It is focused on communicating to the investors, the relative ranking of the default loss probability for a given fixed income investment, in comparison with other rated instruments.
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In fact, the rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to 30 years or more. In addition, long-term rating incorporates an assessment of the expected monetary loss should a default occur. Credit rating helps investors by providing an easily recognizable, simple tool that couples a possible unknown issuer with an informative and meaningful symbol of credit quality. Credit rating can be defined as an expression, through use of symbols, of the opinion about credit quality of the issuer of security/instrument.
Credit rating does not amount to any recommendation to purchase, sell or hold that security. It is concerned with an act of assigning values by estimating worth or reputation of solvency, and honesty to repose trust in a person's ability and intention to repay. The ratings assigned are generally regarded in the investment community as an objective evaluation of the probability that a borrower will default on a given security issue. Default occurs whenever a security issuer is late in making one or more payments that it is legally obligated to make. In the case of a bond, when any interest or principal payment falls due and is not made on time, the bond is legally in default. While many defaulted bonds ultimately resume the payment of principal and interest, others never do, and the issuing company winds up in bankruptcy proceedings. In most instances, holders of bonds issued by a bankrupt company receive only a part amount on his investments, invested, once the company's assets are sold at auction. Thus, the investor who holds title to bankrupt bonds typically loses both principal and interest. It is no wonder, then, that security ratings are so closely followed by investors. In fact, many investors accept the ratings assigned by credit agencies as a substitute for their own investigation of a security's investment quality.
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CHAPTER 3 FACTORS AFEECTING ASSIGNED RATINGS
The following factors generally influence the ratings to be assigned by a credit rating agency: 1. The security issuer’s ability to service its debt. In order, they calculate the past and likely future cash flows and compare with fixed interest obligations of the issuer. 2. The volume and composition of outstanding debt. 3. The stability of the future cash flows and earning capacity of company. 4. The interest coverage ratio i.e. how many number of times the issuer is able to meet its fixed interest obligations. 5. Ratio of current assets to current liabilities (i.e. current ratio (CR) is calculated to assess the liquidity position of the issuing firm. 6. The value of assets pledged as collateral security and the security’s priority of claim against the issuing firm’s assets. 7. Market position of the company products is judged by the demand for the products, competitor’s market share, distribution channels etc. 8. Operational efficiency is judged by capacity utilization, prospects of expansion, modernization and diversification, availability of raw material etc. 9. Track record of promoters, directors and expertise of staff also affect the rating of a company...
In the Indian context, the scope of credit rating is limited generally to debt, commercial paper, fixed deposits and of late mutual funds as well. Therefore, it is the instrument, which is rated, and not the company.
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In other words, credit quality is not general evaluation of issuing organization, i.e. if debt of company XYZ is rated AAA and debt of company ABC is rated BBB, then it does not mean firm XYZ is better than firm ABC. However, the issuer company gets strength and credibility with the grade of rating awarded to the credit instrument it intends to issue to the public to raise funds. Rating, in a way, reflects the issuer's strength and soundness of operations and management. It expresses a view on its prospective composite performance and the organizational behavior based on the study of past results.
Further, the rating will differ for different instruments to be issued by the same company, within the same time span. For example, credit rating for a debenture issue will differ from that of a commercial paper or certificate of deposit for the same company because the nature of obligation is different in each case. Credit rating has been made mandatory for issuance of the following instruments (1) As per the regulations of Securities and Exchange Board of India (SEBI) public issue of debentures and bonds convertible/ redeemable beyond a period of 18 months need credit rating.
(2) As per the guidelines of Reserve Bank of India (RBI), one of the conditions for issuance of Commercial Paper in India is that the issue must have a rating not below the P2 grade from CRISIL/A2 grade from ICRA/PR2 from CARE.
(3) As per the guidelines of Reserve Bank of India (RBI), Non Banking Finance Companies (NBFCs) having net owned funds of more than Rs.2 core must get their fixed deposit programmers rated. The minimum rating required by the NBFCs to be eligible to raise fixed deposits are FA (-) from CRISIL/ MA (-) from ICRA/BBB from CARE. Similar regulations have been introduced by National Housing Bank (NHB) for housing finance companies also.
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(4) As per the regulations of the Ministry of Petroleum, the parallel marketers of Liquefied Petroleum Gas (LPG) and Superior Kerosene Oil (SKO) in India are also subjected to mandatory rating. The three rating agencies have a common approach for such rating and the dealers are categorized into four grades between 1 to 4 indicating good, satisfactory, low risk and high risk.
(5) There is a proposal for making the rating of fixed deposit programmers of limited companies, other than NBFCs also mandatory, by amendment of the companies Act 1956.
The clients for a credit rating agency:
Clients comprise manufacturing companies, non-banking finance companies, nationalized and private banks, financial institutions, public sector units, utilities, real estate developers, state governments, municipal corporations, stock brokers and others.
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CHAPTER 4 FUNCTIONS, BENEFITS AND DISADVANTAGES
Credit rating agencies serves the following functions:
(1) Provides superior Information It provides superior information on credit risk for three reasons: (i) It is an independent rating agency, and is likely to provide an unbiased opinion; unlike brokers, financial intermediaries and underwriters who have a vested interest in the issue, (ii) Due to professional and highly trained staff, their ability to assess risk is better, and finally, (iii) The rating firm has access to a lot of information, which may not be publicly available.
(2) Low cost information A rating firm gathers, analyses, interprets and summarizes complex information in a simple and readily understood formal manner. It is highly welcome by most investors who find it prohibitively expensive and simply impossible to do such credit evaluation of their own.
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(3) Basis for a proper risk and return If an instrument is rated by a credit rating agency, then such instrument enjoys higher confidence from investors. Investors have some idea as to what is the risk that he/she is likely to take, if investment is done in that security.
(4) Healthy discipline on corporate borrowers Higher credit rating to any credit investment tends to enhance the corporate image and visibility and hence it induces a healthy discipline on corporate.
(5) Greater credence to financial and other representation When a credit rating agency rates a security, its own reputation is at stake. Therefore, it seeks high quality financial and other information. As the issue complies with the demands of the credit rating agency on a continuing basis, its financial and other representations acquire greater credibility.
(6) Formation of public policy Public policy guidelines on what kinds of securities are eligible for inclusions in different kinds of institutional portfolios can be developed with greater confidence if debt securities are rated professionally.
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Benefits of credit rating
For different classes of persons different benefits accrue from the use of rated instruments. The benefits directly accruing to investors through rated instruments are:
(A) BENEFITS OF CREDIT RATINGS:
(A) Benefits of ratings to the investors
Investors are benefited in many ways if the corporate security in which they intend to invest their saving has been rated. Some of the benefits are:
(1) Safeguards against bankruptcy Credit rating of an instrument done by a credit rating agency gives an idea to the investors about the degree of financial strength of the issuing company, which enables him to decide about the investment. A highly rated instrument of a company gives an assurance to the investors of the safety of that instrument and a minimum risk of bankruptcy.
(2) Recognition of risk Credit rating provides investors with rating symbols that carry information in easily recognizable manner for the benefit of investors to perceive the risk involved in the investment. It becomes easier for the investors by looking at the symbol to understand the worth of the issuing company. The rating symbol gives them the idea about the risk involved or the expected advantages from the investment.
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(3) Credibility of issuer Rating gives a clue about the credibility of the issuing company. The rating agency is quite independent of the issuer company and has no business connections or any relationship with it or its Board of Directors, etc. Absence of business links between the rater and the rated firms establish ground for credibility and attract investors.
(4) Easy understandability of investment proposal An investor needs no analytical knowledge on his part and can understand the rating symbol. The investor can take quick decisions about the investment to be made in any particular rated security of a company.
(5) Saving of resources Investors rely upon credit rating. This relieves investors from botheration of knowing about the fundamentals of a company, its actual strength, financial standing, management details, etc. The quality of credit rating done by professional experts of the credit rating agency repose confidence in him to rely upon the rating for taking investment decisions.
(6) Independence of investment decisions For making investment decisions, investors have to seek advice of financial intermediaries, the stockbrokers, merchant bankers, the portfolio managers etc. about the good investment proposal. For rated instruments, investors need not depend upon the advice of these financial intermediaries as the rating symbol assigned to a particular instrument suggests the credit worthiness of the instrument and indicates the degree of risk involved in it.
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(7) Choice of investments Several alternative credit rating instruments are available at a particular point of time for investing in the capital market and the investors can make choice depending upon their own risk profile and diversification plan.
(8) Other advantages The investor can quickly understand the credit instrument and weigh the ratings with advantages from instruments; and make quick decisions to invest or sell or buy securities to take advantages of market conditions; or, perceiving of default risk by the company.
(B) Benefits of rating to the company Company which had its credit instrument or security rated by a credit rating agency is benefited in many ways as summarized below:
(1) Lower cost of borrowing A company with highly rated instrument has the opportunity to reduce the cost of borrowing from the public by quoting lesser interest on fixed deposits or debentures or bonds as the investors with low risk preference would come forward to invest in safe securities though yielding marginally lower rate of return.
(2) Wider audience for borrowing A company with a highly rated instrument can approach the investors extensively for the resource mobilization using the press media. Investors in different strata of the society could be attracted by higher rated instrument, as the investors understand the
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degree of certainty about timely payment of interest and principal on a debt instrument with better rating.
(3) Rating as marketing tool Companies with rated instruments improve their own image and avail of the rating as a marketing tool to create better image in dealing with its customers feel confident in the utility products manufactured by the companies carrying higher rating for their credit instruments.
(4) Reduction of cost in public issues A company with higher rated instrument is able to attract the investors and with least efforts can raise funds. Thus, the rated company can economize and minimize cost of public issues by controlling expenses on media coverage, conferences and other publicity stunts and gimmicks. Rating facilitates best pricing and timing of issues.
(5) Motivation for growth Rating provides motivation to the company for growth as the promoters feel confident in their own efforts and are encouraged to undertake expansion of their operations or new projects. With better image created though higher credit rating the company can mobilize funds from public and instructions or banks from self-assessment of its own status, which is subject to self-discipline and self-improvement, it can perceive and avoid sickness.
(6) Unknown issuer Credit rating provides recognition to a relatively unknown issuer while entering into the market through wider investor base who rely on rating grade rather than on 'name recognition'.
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(C) Benefits to brokers and financial intermediaries Rating is a useful tool for merchant bankers and other capital market intermediaries in the process of planning, pricing, underwriting and placement of issues. The intermediaries, like brokers and dealers in securities, could use rating as an input for their monitoring of risk exposures. The merchant bankers are also using credit ratings for pre-packing of issues by way of securitization/ structured obligations. Highly rated instruments put the brokers at an advantage to make less effort in studying the company's credit position to convince their clients to select an investment proposal. This enables brokers and other financial intermediaries to save time, energy, costs and manpower in convincing their clients about investment in any particular instrument.
Disadvantages of credit rating
(1) Biased rating and misrepresentations In the absence of quality rating, credit rating is a curse for the capital market industry, carrying out detailed analysis of the company, should have no links with the company or the persons interested in the company so that their reports impartial and judicious recommendations for rating committee. The companies having lower grade rating do not advertise or use the rating while raising funds from the public. In such cases, the investor cannot get information about the riskiness of instrument and hence is at loss.
(2) Static study Rating is done on the present and the past historic data of the company and this is only a static study. Prediction of the company's health through rating is momentary and anything can happen after assignment of rating symbols to the company. Dependence for future results on the rating, therefore defeats the very purpose of
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risk inductiveness of rating. Many changes take place in economic environment, political
situation, government policy framework, which directly affects the working of a company.
(3) Concealment of material information Rating company might conceal material information from the investigating team of the credit rating company. In such cases, quality of rating suffers and renders the rating unreliable.
(4) Rating is no guarantee for soundness of company Rating is done for a particular instrument to assess the credit risk but it should not be construed as a certificate for the matching quality of the company or its management. Independent views should be formed by the public using the rating symbol.
(5) Human bias Findings of the investigation team, at times, may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating.
(6) Reflection of temporary adverse conditions Time factor affects rating. Sometimes, misleading conclusions are derived. For example, company in a particular industry might be temporarily in adverse condition but it is given a low rating. This adversely affects the company's interest (7) Down grade Once a company has been rated and if it is not able to maintain its working results and performance, credit rating agencies would review the grade and down grade the rating resulting into impairing the image of the company.
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(8) Difference in rating of two agencies Rating done by the two different credit rating agencies for the same instrument of the same issuer company in many cases would not be identical. Such differences are likely to occur because of value judgment differences on qualitative aspects of the analysis in two different agencies.
(9) Conservative Rating Default by an investment-grade firm is seen as the most costly error for the agency. In order to preserve their reputation by avoiding the failure of any investment-grade firm, rating agencies downgrade even "good" firms in response to higher global risk. The downgrades may look self-fulfilling, but in fact, investors rationally ignore them, as they actually convey no information about the relative quality of firms.
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CHAPTER 5 TYPES OF RATINGS
Following are the different kinds of rating:
(1) Bond/debenture rating Rating the short term and medium term debentures/bonds issued by corporate, government etc. is called debenture or bond rating.
(2) Equity rating Rating of equity shares issued by a company is called equity rating. An evaluation of a stock's expected performance and/or its risk level as judged by a
rating agency such as Standard and Poor's. A stock rating will usually help the investor to find out fair value for the stock, based on an objective evaluation of the company. The greater the amount by which the fair value exceeds the market value, the more highly recommended a buy the stock is. Conversely, if the market value of the stock exceeds the fair value of the stock, then analysts recommend that the stock be sold. Most stock rating systems give stocks 1 to 5 stars, with 5 being the best.
(3) Preference share rating Rating of preference share issued by a company is called preference share rating.
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(4) Commercial paper rating Commercial papers are instruments used for short-term borrowing. Commercial papers are issued by manufacturing companies, finance companies, banks and financial institutions and rating of these instruments is called commercial paper rating.
(5) Fixed deposits rating Fixed deposits programmers are medium term unsecured borrowings. Rating of such programmes is called as fixed deposits rating.
(6) Borrowers rating Rating of borrowers is referred as borrower rating.
(7) Individuals rating Rating of individuals is called as individual's credit rating.
(8) Structured obligation Structured obligations are also debt obligations and are different from debenture or bond or fixed deposit programmes and commercial papers. Structured obligation is generally asset-backed security. Credit rating agencies assessed the risk associated with the transaction with the main trust on cash flows emerging from the asset would be sufficient to meet committed payments, to the investors in worst case scenario.
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(9) Sovereign rating Is a rating of a country, which is being considered whenever a loan is to be extended, or some major investment is envisaged in a country. It is a grading of a country's ability to meet its financial obligations. Credit rating
agencies provide these ratings and investors use this to assess the level of risk related with investing in a country. The rating may also include an evaluation of a
country's political risk. For example, India has been given BBB negative rating by Standard and poor’s as on April 2012.
Because it is the doorway into a country's investment atmosphere, the sovereign rating is the first thing most institutional investors will look at when making a decision to invest money abroad. This rating gives the investor an immediate understanding of the level of risk associated with investing in the country. A country with a sovereign rating will therefore get more attention than one without. So to attract foreign money, most countries will strive to obtain a sovereign rating and they will strive even more so to reach investment grade. In most circumstances, a country's sovereign credit rating of AAA indicates lowest risk.
(10) Rating of real estate CRISIL has started assigning rating to the builders and developers with the objective of helping and guiding prospective real estate buyers. CRISIL thoroughly scrutinizes the sale deed papers, sanctioned plan; lawyers report government clearance certificates before assigning rating to the builder or developer. Past experience of the builder, number of properties built by the builder, financial strength, and time taken for completion are some of the factors taken into consideration by the CRISIL before giving a final rating to the real estate builder developer.
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(11) Bank ratings CRISIL and ICRA both are engaged in rating of banks based on the following six parameters also called CAMELS. C - C stands for capital adequacy of banks. A bank needs to maintain at least 10 % capital against risky assets of the bank. A - A stands for asset quality. The loan is examined to determine non-performing assets. An asset/loan is considered non-performing asset where either interest or principal is unpaid for two quarters or more. Ratios like NPA to Net Advances, Adequacy of Provision & Debt Service Coverage Ratio are also calculated to know exact picture of quality of asset of a bank. M - M stands for management evaluation. Here, the efficiency and effectiveness of management in framing plans and policies is examined. Ratios like ROI, Return on Capital Employed (ROCE), and Return on Assets (ROA) are calculated to comment upon bank’s efficiency to utilize the assets. L - L indicates liquidity position. Liquid and current ratios are determined to find out banks ability to meet its short-term claims. S - S stands for Systems and Control studied to determine their adequacy and efficiency.
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CHAPTER 6 ROLES AND OPRATIONS OF CREDIT RATING AGENCIES: CRISIL, ICRA and CARE
CRISIL (Credit Rating Information Services of India Limited) Particular Incorporated in Promoted By 1987 Industrial Credit and Investment Corporation of India Ltd. (ICICI) and Unit Trust of India ICRA (Investment Information and Credit Rating Agency of India Ltd.) 1991 Industrial Finance Corporation of Ind ia(26%), and UTI, LIC, GIC, PNB, Central Bank of India, Bank of Baroda, Uco Bank etc. (74%) New Delhi CARE (Credit Analysis and Research Ltd.)
1993 IDBI Jointly with investment institutions, banks and finance companies
Registered Office Rating Process
Mumbai
Mumbai
1. Request of the company 2. Assignment to Analytical team 3. Obtaining and processing of data 4. Finding presentation 5. Communication of decision 6. Monitoring of change of rating
1. Rating request 2. Rating team 3. Information requirement 4. Secondary information 5. Management meeting and plant visits 6. Preview Meeting 7. Rating Committee meeting 8. Rating communication 9. Rating reviews 10. Surveillance
1. Client request and submission of information 2. Analyze information 3. Team undertakes site 4. Form Internal Committee for preview analyses 5. Assign Rating 6. Review of rating assign
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[Type here] Rating Symbols
Long Term (Rating Symbols for Debentures)
1. AAA – Highest Safety 2. AA – High Safety 3. A – Adequate Safety 4. BBB – Moderate Safety 5. BB – Inadequate Safety 6. B – High Risk 7. C – Substantial Risk 8. D – Default
1. LAAA : Highest Safety 2. LAA+, LAA, LAA: High Safety 3. LA+, LA, LA- : Adequate Safety 4. LBBB+, LBBB, LBBB- : Moderate Safety 5. LBB+, LB, LB- : Risk Prone 6. LC+, LC, LC- : Substantially Risk 7. LD : Extremely speculative
1. CARE AAA : Highest Safety 2. CARE AA : High Safety 3. CARE A : Adequate Safety 4. CARE BBB : Moderate Safety 5. CARE BB : High Risk 6. CARE B : Substantially Risk 7. CARE C : Extremely High Risk 8. CARE D : Likely to be default soon 1. CARE 1 : Excellent Safe 2. CARE 2 : Very Well Safe 3. CARE 3 : Adequate Safety 4. CARE 4 : Favorable Safe 5. CARE 5 : Default
Medium Term (Fixed Deposit)
1. FAAA : Highest Safety 2. FAA : Adequate Safety 3. FA : Safety 4. FB : Inadequate Safety 5. FC : High Risk 6. FD : Default
Short Term (Commercial Paper)
1. P1 : Very Strong Safety 2. P2 : Strong Safety 3. P3 : Adequate Safety 4. P4 : Favorable 5. P5 : Default
1. MAAA : Highest Safety 2. MAA+, MAA, MAA- : High Safety 3. MA+, MA, MA- : Adequate Safety 4. MB+, MB, MB- : Inadequate Safety 5. MC+, MC, MC- : Risk Prone 6. MD : Default 1. A1+, A1 : Highest Safety 2. A2+, A2 : High Safety 3. A3+, A3 : Adequate Safety 4. A4+, A4 : Risk Prone 5. A5 : Default
1. PR1 : High Rate of Return 2. PR2 : Strong Capacity for repayment 3. PR3 : Adequate capacity for Re 4. PR4 : Minimal Degree of Safety 5. PR5 : Likely to be default
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CHAPTER 7 CREDIT RATING PROCESS OF DEBT INSTRUMENT: HDFC
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About HDFC
? Housing Development Finance Corporation Limited (HDFC Ltd.) was established in 1977 with the primary objective of meeting a social need of encouraging home ownership by providing long-term finance to households thereby being pioneer and leader in housing finance in India. It has a network of 318 outlets (including subsidiary distribution company) covering over 2400towns and cities. ? Individual housing loans constituted 66 per cent of HDFCs loan book as on March 31, 2012 and 67 per cent as on June 30, 2012. As on June 30, 2012, rental discount constituted 7 per cent of the portfolio, while corporate loans and construction finance constituted 13 per cent each. Loans against property and promoter funding currently constitute less than 5 per cent of the portfolio. ? ? HDFC’s primary sourcing partner is its subsidiary, HDFC Sales Pvt Ltd, which accounts for 47 percent of its origination. In addition, HDFC Bank sources housing loans for HDFC for a fee: in 201112, 28 per cent of HDFC’s individual loans disbursed were sourced through HDFC Bank. HDFC retains control over credit, legal, and technical appraisals of all loans, as per its agreement with HDFC Bank. HDFC can sell back up to 55 per cent of these loans to HDFC Bank under the mortgage-backed securities and loan assignment route. ? In 2011-12, HDFC sold Rs.49.8 billion of individual loans to HDFC Bank under the assignment route. Both companies benefit from this arrangement. While HDFC earns a fee income from HDFC Bank for administering and servicing loans, HDFC Bank obtains high-quality assets based on HDFC’s proven evaluation capabilities
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Instruments rated
? ? ? ? ? ? Rs.300.0 Billion Non-Convertible Debentures- CRISIL AAA/Stable Non Convertible Debentures aggregating Rs.844.93 Billion- CRISIL AAA/Stable Bonds Aggregating Rs.1.0085 Billion- CRISIL AAA/Stable Subordinate Bond Aggregating Rs.38.75 Billion- CRISIL AAA/Stable Rs.150 Billion Short Term Debt- CRISIL A1+ Fixed Deposits- FAAA/Stable
Different Rating of Products of Various Banks
?
HDFC Bank Products CARE PR1+ CARE AAA CARE AAA(FD) CARE AAA Fitch Rating India Pvt Ltd tAAA AAA AAA AAA
HDFC Bank Certificate of Deposit HDFC Bonds HDFC Fixed Deposit HDFC Mutual Fund Top 200
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?
ICICI Bank Products CRISIL AAA P1 FAAA P1
ICICI 7.8% Debentures ICICI Bank Certificate of Deposit ICICI Bank Fixed Deposit ICICI Commercial Paper
?
Central Bank of India Products CRISIL AAA FAAA P1
Central Bank of India 9% Debentures Central Bank of India Fixed Deposit Central Bank of India Certificate of Deposit
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Rating Rationale
1. Leading market position and strong track record in housing finance ? HDFC has a track record of more than 35 years of profitable growth in the individual and corporate housing finance segments. ? HDFC has maintained its position as one of the top players in the housing finance business in India, with mortgage loans registering a compound annual growth rate (CAGR) of 18 per cent (excluding loans sold) over the past five years. ? In 2011-12 HDFC disbursed Rs.711.1 billion—a growth of 18 per cent over the previous year. ? Loan approvals grew by 20 per cent in 2011-12. For the quarter ended June 30, 2012, loan approvals grew by 17 per cent and loan disbursements grew by 20 per cent as compared to the corresponding quarter in the previous year.
2. Strong Asset quality ? HDFC has a strong asset quality, backed by strong risk management systems and efficient credit approval mechanisms. ? As on March 31, 2012, the company had low gross non-performing loans (NPLs), accounting for 0.74 per cent of its total loan portfolio, as against 0.77 per cent the previous year. ? HDFC has nil net NPAs. As on June 30, 2012, gross NPLs were 0.79 per cent of the portfolio.
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3. Well-diversified and stable resource base
? HDFC has a well-diversified and stable resource base, comprising fixed deposits, bank borrowings, debentures, bonds, and foreign currency borrowings. ? This lends flexibility to the company’s borrowings, allowing it to manage borrowing costs. ? HDFC’s cost of borrowings increased to 8.8 per cent (on a yearly average basis) in 2011-12 from 7.1 percent in 2010-11. This is in line with industry trends.
4. Healthy capitalization and profitability ? HDFC has a comfortable financial risk profile, underpinned by robust capitalization and healthy profitability. ? As on March 31, 2012, HDFC had a large net worth of Rs.190.2 billion. ? The company reported an overall Capital adequacy ratio CAR of 14.6 per cent as on the same date. ? HDFC and its wholly owned subsidiaries, HDFC Investments Ltd and HDFC Holdings Ltd, currently hold 23.1 per cent stake in HDFC Bank. ? HDFC’s net worth remains comfortable even when adjusted for such strategic investments. CRISIL believes that HDFC’s capitalization will remain healthy over the medium term, given the company’s strong internal accruals. ? HDFC’s consistently robust asset quality is also expected to support its capitalization. Additional requirements for capital infusion in subsidiaries have also reduced. ? HDFC’s earnings profile is marked by healthy interest spreads, low expense levels, and good return on net worth (RoNW). ? The company maintained a healthy interest spread on loans over cost of borrowings in the range of 2.15 to 2.35 per cent over the past four years, reporting an interest spread of 2.27 per cent in 2011-12. ? Its profit after tax of Rs.41.2 billion in 2011-12 translated into a RoNW of 22.7%.
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? HDFC’s earnings profile is marked by an adequate net profitability margin (NPM) of 2.1 per cent (post credit costs) in 2011-12. ? There was some contraction in gross spread during 2011-12 given the higher borrowing costs. However, 84 per cent of HDFC’s assets and 75 per cent of liabilities were on a floating rate basis, which allows it to manage interest spreads. ? Additionally, on April 1, 2012, approximately Rs.216.0 billion of the dual rate loans have converted to floating rate loans which is expected to result in higher yields on this portfolio, thus improving spreads. ? CRISIL believes that HDFC will maintain a stable, above-average earnings profile over the medium term.
Conclusion
CRISIL believes that Housing Development Finance Corporation Ltd (HDFC) will maintain a stable credit risk profile over the medium term on the back of its strong asset quality, and healthy capitalization and profitability. CRISIL also believes that HDFC’s strong franchise and fundamentals will enable the company to maintain its competitive position, supporting its current ratings. The outlook may be revised to ‘Negative’ if HDFC’s asset quality or profitability weakens significantly.
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CHAPTER 8 CREDIT RATING PROCESS FOR IPO: CASE STUDY OF COAL INDIA LTD.
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IPO GRADING IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. It was started in the year 2006.Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below. IPO grade 1: Poor fundamentals IPO grade 2: Below-average fundamentals IPO grade 3: Average fundamentals IPO grade 4: Above-average fundamentals IPO grade 5: Strong fundamentals IPO grading has been introduced as a process to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO. A company which has filed the draft offer document for its IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO from at least one Credit rating agencies. IPO Grading is intended to provide the investor with an informed and objective opinion expressed by a professional rating agency after analyzing factors like business and financial prospects, management quality and corporate governance practices etc. However, irrespective of the grade obtained by the issuer, the investor needs to make his/her own independent decision regarding investing in any issue after studying the contents of the prospectus including risk factors carefully.
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IPO grades cannot be rejected irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP Guidelines. However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.
CASE STUDY OF COAL INDIA LTD
India is currently among the top three fastest growing economies of the world. As natural corollary India's energy needs too are fast expanding with its increased industrialization and capacity addition in Power generation. This is where 'Coal' steps in. In India coal is the critical input for major infrastructure industries like Power, Steel and Cement.
? ?
Coal is the most dominant energy source in India's energy scenario. Coal meets around 52% of primary commercial energy needs in India against 29% the world over.
? ?
Around 66% of India's power generation is coal based. India is the 3rd largest coal producing country in the world after China and USA.
About COAL INDIA LTD Government of India-owned Coal India produces and sells coal in the country. It is the largest coal reserve holder in the world. It is also the largest producer of coal in the world. In FY10, it produced 431 mn tones of coal which accounted for 81% of the coal production in India.
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The company owns and operates 471 coal mines - 163 are open cast, 273 are underground and the rest are mixed. Coal production is carried out by the seven subsidiaries of the company; namely
? ? ? ? ? ? ?
Bharat Coking Coal Limited (BCCL)(Dhanbad, Jharkhand) Central Coalfields Limited (CCL)(Ranchi, Jharkhand) Western Coalfields Limited (WCL)(Nagpur region) Eastern Coalfields Limited (ECL)(Sanctoria, Asansol, West Bengal) Central Mine Planning and Design Institute Limited (CMPDIL)(Ranchi, Jharkhand) South Eastern Coalfields Limited (SECL)(Bilaspur) Northern Coalfields Limited, Singrauli (NCL,Singrauli)
Two of them - Mahanadi Coalfields and South Eastern Coalfields - together contribute 50% of the company’s production. Another subsidiary – Central mine planning and design institute CMPDIL – carries out mine exploration and development works for the coal-producing subsidiaries. Coal India has a dominant position (81% market share) in the Indian coal industry, catering to 53% of the country’s energy requirement. The demand for coal is expected to increase at an annual rate of 11.2% over the next four years on the back of increase in thermal power plants being set up in the country. Coal India enjoys cost competitive advantage over international players since nearly 90% of its production is from open cast mines and have low stripping ratios. As a result, the notified prices of Coal India are significantly lower than imported coal prices adjusted for calorific value. The grade also takes into account the de-controlled pricing regime and Coal India’s ability to increase coal prices in the past. This grade indicates that the fundamentals of the IPO are strong relative to the other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The offer price for the issue may be higher or lower than the level justified by its fundamentals.
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The grade is not a recommendation to buy, sell or hold the graded instrument, its future market price or suitability for a particular investor. To arrive at the overall grade, amongst various other parameters, CRISIL has considered the company’s business prospects, its financial performance, management capabilities and corporate governance practices. DETAILED GRADING PARAMETERS 1. BUSINESS PROSPECTS
(A) Strong growth in domestic demand for coal, but supply growth lagging ? Coal is the primary source of energy, accounting for nearly 53% of the total energy consumption in India ? Since India has huge coal resources (276 bn tones as of March 2010), the Integrated Energy Policy 2006 expects coal to remain the prime source of energy, accounting for 50% of the primary commercial energy requirement of India ? CRISIL Research expects the demand for coal in India to grow at 11.2% CAGR to 933 MT (million tons) in FY14. ? Under the Eleventh Five-Year Plan, India plans to add power generation capacity of 78 GW. Nearly 67% of this capacity is coal-based, indicating that the demand for coal would primarily come from the power sector ? The demand for non-coking coal is expected to grow at CAGR of 11.3% whereas that for coking coal is expected to grow at 9.7% CAGR over FY09-14 (CRISIL Research estimates). ? The overall domestic production is, however, estimated to grow at 7.2% CAGR over FY09-14 to 672 MT resulting in an acute shortage of coal in the domestic market ? CRISIL Research expects imports of coal to treble to 180 MT in FY14 from 59 MT in FY10 to meet the shortage
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(B) Largest producer of coal in the world, dominant position in India ? Coal India is the largest producer of coal in the world. It owns 48% of India’s proven reserves and contributes over 81% of the total coal production in India. ? Given India’s abundant coal reserves and the absence of other sustainable fuel sources, the company plays a strategic role in meeting India’s energy requirements. ? CRISIL Research estimates Coal India to contribute 80% of the Indian coal production in FY12 and, thus, maintain its dominant position. ? Nearly 90% of the company’s production is from open cast mines. Moreover most of these open cast mines have low stripping ratios, which provide the company with a significant cost advantage. (C)Established capabilities of mine exploration, development and operations ? Coal India has developed strong skills for exploration, development and production from coal mines. ? The company’s wholly-owned subsidiary Central Mine Planning and Design Institute Limited (CMPDIL) carries out exploration, mine development and design work for Coal India. ? CMPDIL has explored over 500 coal projects and has been able to prove 80 bn tones of coal reserves. It has carried out planning for open cast mines for capacity up to 25 MTPA and depth of 480 meters, and underground mines for capacity up to 3.5 MTPA and depth of 600 meters. ? The company is currently operating 163 open cast and 273 underground mines. The capabilities have helped the company grow its production at a CAGR of 5.2% from 260 MT in FY00 to 431 MT in FY10.
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(D)Deregulation of pricing - Coal India increases prices to cover rise in production costs ? The company supplies coal to its customers through Fuel Supply Agreement (FSA) at prices which it notifies from time to time. As a result of the deregulation of coal pricing in India, Coal India is able to increase its notified prices to cover any rise in production, thereby protecting its profitability. ? The dominant position of the company helps it to pass on the rise in production and transportation costs, and changes in statutory levies to its customers. ? The company has announced four price increases since FY00; the average price has increased at 4.9% CAGR over FY00-10. ? However, the notified prices of the company are still significantly below the international prices, giving it a competitive advantage.
(E)Shift in sales mix towards market-linked pricing ? Apart from the sale of coal under FSA at notified prices, the company supplies certain portion of its production at market-linked prices through E-Auctions and specific MoUs. Under E-Auction, the company sells around 10% of its production at market-determined rates. ? It also sells certain quantity of higher grade non-coking coal (A, B, C grades) and beneficiated coal through specific MoUs with its customers at prices which are 15% below the import parity prices for similar grade coal. ? The company plans to set up 20 coal beneficiation facilities with a capacity of 111 MT; they are expected to come on stream by FY17.
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(F)New projects and utilization of cash to drive growth ? The company has identified 45 coal mining projects which are under various stages of planning and development for implementation in Eleventh and Twelfth five-year plans. Of these, 25 projects with estimated production of 47.51 MTPA and Capex requirement of Rs 33.9 bn are expected to become operational by endFY12. ? Whereas 20 projects with estimated production of 33.27 MTPA and Capex requirement of Rs 25.8 bn would become operational during the Twelfth FiveYear Plan. ? Additionally, the company intends to develop 20 coal beneficiation facilities with a capacity of 111 MTPA at a capex of Rs 23.3 bn, which would come on stream between FY14 and FY17. ? The company has a strong cash balance of Rs 390 bn as of FY10.
(G)New projects and utilization of cash to drive growth ? The company has identified 45 coal mining projects which are under various stages of planning and development for implementation in Eleventh and Twelfth five-year plans. Of these, 25 projects with estimated production of 47.51 MTPA and Capex requirement of Rs 33.9 bn are expected to become operational by endFY12. ? Whereas 20 projects with estimated production of 33.27 MTPA and Capex requirement of Rs 25.8 bn would become operational during the Twelfth FiveYear Plan. ? Additionally, the company intends to develop 20 coal beneficiation facilities with a capacity of 111 MTPA at a capex of Rs 23.3 bn, which would come on stream between FY14 and FY17.
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? The company has a strong cash balance of Rs 390 bn as of FY10. Utilization of this cash for mining projects and overseas acquisitions planned by the company would drive the ….33. ? 33 company’s growth going ahead. (H)Delay in regulatory approvals a key hurdle to production ? The coal sector in India is riddled with delays in securing regulatory approvals, especially for forest clearances. ? Forest clearances take between three and eight years, which could affect the growth plans of the company.
2. FINANCIAL PERFORMANCE PARTICULARS FY 09 ACTUAL Operating income EBITDA margins Net profits RONW Basic EPS Diluted EPS No. of equity shares Net worth Rs mn 341,875 % 19.5 FY 10 ACTUAL 410,175 15.7 40,628 21.4% 6.4 6.4 6,316 190,081 30.1 FY 11 ACTUAL 466,703 27.6 98,294 38.0% 15.6 15.6 6,316 258,437 40.9
Rs mn 42,850 % Rs Rs Mn 24.9% 6.8 6.8. 6,316
Rs mn 172,007 27.2
Book value (FV Rs Rs 10) Current ratio Times
1.21
1.20
1.34
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? Coal India’s revenues grew at a two-year CAGR of 17.0% to Rs 467 billion in FY11 primarily on account of 5.5%CAGR in sales volumes and 10.8% CAGR in average realization over FY08-11 due to increase in notified prices and sale of coal under market-linked prices through E-Auction and MoUs. ? The company’s EBITDA margins dipped to 15.7% in FY10 as a result of increase in employee costs. ? The upward revision in wages and the executive pay revision led to a 51.7% increase in overall employee cost in FY11. The EPS of the company grew at a two-year CAGR of 51% to Rs 15.6 in FY09. ? The RoE increased to 38.0% in FY09, in line with higher profitability. As on FY11, the company has cash and bank balance of Rs 390 bn and net worth of Rs 258 bn. ? Since this is an offer for sale by GOI, the company would not receive any proceeds from the IPO and there would be no change in equity of the company.
3. Management Capabilities and Corporate Governance ? Coal India’s top management is well qualified and highly experienced. Most of the directors started their careers with the company. The senior management has been instrumental in making the shift towards market-linked pricing for coal and in turning around the loss-making subsidiaries like Eastern Coalfields Limited and Bharat Coking Coal Limited. ? However, the management has been unable to deploy the huge cash balance with the company. Ability of the management to deploy the surplus cash in productive assets would have a bearing on its future return on equity. ? Coal India was accorded the ‘Navratna’ status in 2008, which has given it autonomy in functioning. Moreover, six of its nine subsidiaries have won the ‘mini-Navratna’ status which entails quicker decisions at the subsidiary level. ? Po0st IPO process, the shareholding pattern of the company was 90% of the stake been retained by the GOI. And remaining 10% by the public.
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Correlation between Revenue and Earnings per Share of the COAL India Ltd. In business, revenue or turnover is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Earnings per share (EPS) are the amount of earnings per each outstanding share of a company's stock. Hereby I try to find the relationship between Revenue and Earnings Per share.
Hypothesis: Ho: There is no relationship between Revenue and Earnings Per Share of COAL India Ltd H1: There is relationship between Revenue and Earnings per Share
Chart:
Years Mar'08 Mar'09 Mar'10 Mar'11 Mar'12 Interpretation:
Revenue 3490.55 4610.49 4760.69 5544.59 9500.51
EPS 388.48 5.22 5.98 7.48 12.77
=CORROL (3490.55, 4610.49, 4760.69, 5544.59, 9500.51:388.48, 5.22, 5.98, 7.48, 12.77) Answer: 0.491001123 – Moderate Relationship
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As we can see revenue of COAL India is rise day by day the Earning per share of the company also increase gradually. Shareholders earn good earnings on their investment. But as company done progress Earning per share of company does not rise proportionally. From the above observation H1 hypothesis is accepted as there is moderate relationship between Revenue and Earnings Per Share, If the answer of the correlation is between 0.1- 0.2 which mean there is weak relationship between our variable, if answer of the correlation is between 0.3-0.7 which mean there is moderate relationship between our variable, and if answer of the correlation is between 0.7-1.0 which mean there is strong relationship between our variable. For proving above observation Balance Sheet, Profit and Loss Account and Ratio Analysis of the COAL INDIA LTD.
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Balance Sheet of Coal India Mar '12 Mar '11 ------------------- in Rs. Cr. ------------------Mar '10 Mar '09 Mar '08
12 mths
12 mths
12 mths
12 mths
12 mths
Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 6,316.36 6,316.36 0.00 0.00 13,248.39 0.00 19,564.75 0.00 1,173.54 1,173.54 20,738.29 Mar '12 6,316.36 6,316.36 0.00 0.00 13,121.02 0.00 19,437.38 0.00 1,370.43 1,370.43 20,807.81 Mar '11 6,316.36 6,316.36 0.00 0.00 10,744.36 0.00 17,060.72 0.00 1,464.30 1,464.30 18,525.02 Mar '10 6,316.36 6,316.36 0.00 0.00 8,920.86 0.00 15,237.22 0.00 1,786.62 1,786.62 17,023.84 Mar '09 6,316.36 6,316.36 0.00 0.00 7,052.93 0.00 13,369.29 0.00 1,510.83 1,510.83 14,880.12 Mar '08
12 mths
12 mths
12 mths
12 mths
12 mths
Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress 408.98 295.42 113.56 60.75 387.46 289.13 98.33 55.67 376.63 283.23 93.40 17.84 368.92 273.95 94.97 5.99 355.30 266.60 88.70 1.07
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Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets 6,541.19 18.51 0.01 15,302.72 15,321.24 8,675.46 0.00 23,996.70 0.00 8,529.27 1,444.64 9,973.91 14,022.79 0.00 20,738.29 6,319.17 35.70 0.00 373.37 409.07 9,484.74 11,286.14 21,179.95 0.00 5,837.37 1,007.95 6,845.32 14,334.63 0.00 20,807.80 6,316.57 26.59 0.00 217.27 243.86 8,380.19 8,916.10 17,540.15 0.00 4,763.78 679.14 5,442.92 12,097.23 0.00 18,525.04 6,316.36 19.52 0.02 139.00 158.54 9,354.33 6,323.76 15,836.63 0.00 4,521.26 708.85 5,230.11 10,606.52 0.00 17,023.84 6,316.36 10.44 0.00 92.60 103.04 8,635.55 4,571.36 13,309.95 0.00 4,363.30 472.65 4,835.95 8,474.00 0.00 14,880.13
Contingent Liabilities Book Value (Rs)
312.15 30.97
289.93 30.77
164.74 27.01
190.86 24.12
0.00 2,116.61
Source : Dion Global Solutions Limited
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Profit & Loss account of Coal India Mar '12 ------------------- in Rs. Cr. ------------------Mar '11 Mar '10 Mar '09 Mar '08
12 mths
12 mths
12 mths
12 mths
12 mths
Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses 3.74 5.45 345.34 52.34 9.48 98.98 0.00 515.33 Mar '12 8.57 6.92 237.71 39.01 239.57 63.99 0.00 595.77 Mar '11 6.06 5.93 240.91 29.66 155.41 61.84 0.00 499.81 Mar '10 7.64 8.48 282.10 21.21 110.09 47.52 0.00 477.04 Mar '09 7.73 9.00 164.00 21.50 175.86 22.28 0.00 400.37 Mar '08 486.56 70.70 415.86 9,101.71 -17.06 9,500.51 468.81 7.50 461.31 5,074.74 8.54 5,544.59 449.21 1.07 448.14 4,305.88 6.67 4,760.69 318.89 0.84 318.05 4,284.11 8.33 4,610.49 273.01 1.20 271.81 3,231.93 -13.19 3,490.55
12 mths 12 mths 12 mths 12 mths 12 mths
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Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualized) 63,163.6 4 12.77 100.00 30.97 -116.53 8,985.18 378.73 8,606.45 6.96 0.00 8,599.49 -84.39 8,515.10 450.00 8,065.10 511.59 0.00 6,316.36 0.00 -125.92 4,948.82 222.89 4,725.93 5.57 0.00 4,720.36 165.72 4,886.08 190.00 4,723.56 587.18 0.00 2,463.38 0.00 -45.00 4,260.88 386.46 3,874.42 8.99 0.00 3,865.43 114.65 3,980.08 200.00 3,779.92 493.75 0.00 2,210.00 0.00 -150.66 4,133.45 475.30 3,658.15 6.17 0.00 3,651.98 -192.35 3,459.63 162.85 3,295.38 469.39 0.00 1,705.42 0.00 -141.75 3,090.18 448.30 2,641.88 6.50 0.00 2,635.38 -60.77 2,574.61 120.81 2,453.80 392.64 0.00 1,705.42 289.84
Shares in issue (lakhs) Earnings Per Share (Rs) Equity Dividend (%) Book Value (Rs)
63,163.64 7.48 39.00 30.77
63,163.64 5.98 35.00 27.01
63,163.64 5.22 27.00 24.12
631.64 388.48 27.00 2,116.61
Source : Dion Global Solutions Limited
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Key Financial Ratios of Coal India
Mar '12
Mar '11
Mar '10
Mar '09
Mar '08
Investment Valuation Ratios Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Operating Profit Margin (%) Profit Before Interest And Tax Margin (%) Gross Profit Margin (%) Cash Profit Margin (%) Adjusted Cash Margin (%) Net Profit Margin (%) Adjusted Net Profit Margin (%) Return On Capital Employed (%) Return On Net Worth (%) Adjusted Return on Net Worth (%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Return on Long Term Funds (%) -28.02 -1.29 -29.69 85.69 85.69 84.73 84.73 43.29 41.22 41.65 30.97 30.97 43.29 -19.20 -1.70 -20.41 82.60 82.60 85.35 85.35 23.92 24.30 23.48 30.77 30.77 23.92 -10.08 -1.14 -12.08 77.26 77.26 79.59 79.59 22.92 22.15 21.45 27.01 27.01 22.92 -47.81 -3.44 -49.75 75.86 75.86 71.76 71.76 24.17 21.62 22.82 24.12 24.12 24.17 -52.15 -4.30 -54.54 71.46 71.46 71.24 71.24 20.32 18.35 18.36 2,116.61 2,116.61 20.32 10.00 10.00 -0.18 0.66 --10.00 3.90 -0.14 0.73 16.48 -10.00 3.50 -0.07 0.71 12.99 -10.00 2.70 -0.24 0.50 10.57 -1,000.00 270.00 -22.44 43.03 806.02 --
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Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital Profit & Loss Account Ratios Material Cost Composition Imported Composition of Raw Materials Consumed Selling Distribution Cost Composition Expenses as Composition of Total Sales 0.89 1.85 1.35 2.40 2.84 26.29 64,474.42 26.29 1.17 0.02 0.02 --12,139.19 14.33 297,621.55 14.33 1.19 0.02 0.02 -16.29 11,186.47 18.58 43,934.94 18.58 1.19 0.02 0.03 -10.91 9,718.02 18.22 29.77 23.71 0.06 23.72 22.31 24.48 0.07 22.36 22.22 11.59 0.09 11.01 10.80 9.11 0.12 8.67 7.95 7.06 0.11 6.76 6.49 2.41 2.40 0.06 0.06 3.09 3.09 0.07 0.07 3.22 3.22 0.09 0.09 3.03 3.02 0.12 0.12 2.75 2.75 0.11 0.11
15,745.09 36,484.40 18.22 0.86 0.02 0.02 -7.06 29.77 0.77 0.02 0.77 -3.99
12,005.47 11,223.47
--
--
--
--
--
-0.02
29.49 1.67
24.14 1.62
22.71 2.19
36.09 --
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Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio Adjusted Cash Flow Times 78.31 78.24 22.50 22.56 0.14 52.15 52.08 46.05 46.12 0.30 58.46 58.32 39.63 39.78 0.40 51.75 51.65 50.97 51.05 0.51 81.31 81.09 18.73 18.95 0.61
Mar '12
Mar '11
Mar '10
Mar '09
Mar '08
Earnings Per Share Book Value
12.77 30.97
7.48 30.77
5.98 27.01
5.22 24.12
388.48 2,116.61
Source : Dion Global Solutions Limited
Conclusion Coal India ltd is the only IPO which has a grade of 5/5 by all the three major credit rating agencies. CIL will continue to maintain its dominant market position in the domestic coal market and maintain its healthy cash accruals and surplus liquidity position over the medium term. The outlook may be revised to ‘Negative’ if the company’s market position deteriorates and profitability declines significantly due to adverse changes in India’s coal policy.
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Chapter 10 SEBI REGULATIONS: GENERAL OBLIGATIONS OF RATING AGENCIES
SEBI REGULATIONS
SECURITIES AND EXCHANGE BOARD OF INDIA (CREDIT RATING AGENCIES) REGULATIONS, 1999
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GENERAL OBLIGATIONS OF CREDIT RATING AGENCIES
Code of Conduct 13. Every credit rating agency shall abide by the Code of Conduct contained in the Third Schedule.
1. Agreement with the Client Every Credit Rating Agency shall enter into Written Agreement which contains i. ii. iii. iv. v. The rights and liabilities of each party The fee to be charged by the credit rating agency Agreement to a periodic review of the rating by the credit rating agency Agreement of co-operation with the credit rating agency Credit rating agency shall disclose to the client the rating assigned to the securities vi. Client shall agree to disclose the following documents a. The rating assigned to the client’s listed securities by any credit rating agency during the last three years b. Any rating given by any other credit rating agency, which has not been accepted by the client
2. Monitoring of rating
1. Every credit rating agency shall carry out periodic reviews of all published ratings during the lifetime of the securities. 2. If the client does not co - operate with the Credit Rating Agency so Credit Rating Agency shall carry out the review on the basis of the best information available.
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3. A credit rating agency shall not withdraw a rating so long as the obligations under the security rated by it are outstanding
2. Internal procedures to be framed.
Every Credit Rating Agency shall frame appropriate procedures and systems in order to prevent contravention of – (a) The Securities and Exchange Board of India (Insider Trading) Regulations, 1992; (b) The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995; and (c) Other laws relevant to trading of securities. 4. Disclosure of Rating Definitions and Rationale Every Credit Rating Agency: 1. Shall make public the definitions of the concerned rating, along with the symbol 2. Ratings do not constitute recommendations to buy, hold or sell any securities 3. Every credit rating agency shall make available to the general public information relating to the rationale of the ratings, which shall cover an analysis of the various factors justifying a favorable assessment, as well as factors constituting a risk. 5. Submission of Information to the Board Information called by Board from a Credit Rating Agency for the purpose of regulations, Credit Rating Agency shall furnish such information to the Board – a. Within a period specific by the Board or, b. If no such period specified by the Board, c. If no such period is specified then within a reasonable time.
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Every Credit Rating Agency shall, at the close of each accounting period, furnish to the Board copies of its Balance Sheet and Profit and Loss account.
6. Compliance with circulars etc., issued by the Board Every credit rating agency shall comply with such guidelines, directives, circulars and Instructions as may be issued by the Board from time to time, on the subject of credit rating. 7. Appointment of Compliance Officer 1. Every Credit Rating Agency shall appoint Compliance Officer who shall be responsible for monitoring rules and regulations and circulars issued by Board or the Central Government. 2. The compliance officer shall immediately and independently report to the Board any noncompliance observed by him. 8. Maintenance of Books of Accounts, records, etc. Every credit rating agency shall keep and maintain, for a minimum periods of five years the following books of accounts, records and documents, namely: (a) Copy of its balance sheet, as on the end of each accounting period; (b) A copy of its profit and loss account for each accounting period; (c) A copy of the auditor’s report on its accounts for each accounting period. (d) A copy of the agreement entered into, with each client; (e) Information supplied by each of the clients; (f) Correspondence with each client; (g) Ratings assigned to various securities including up gradation and down gradation (if any) of the ratings so assigned.
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9. Steps on Auditor’s Report Every credit rating agency shall, within two months from the date of the auditor’s report, take steps to rectify the deficiencies if any, made out in the auditor’s report, in so far as they relate to the activity of rating of securities 10. Confidentiality Every credit rating agency shall treat, as confidential, information supplied to it by the client and no credit rating agency shall disclose the same to any other person.
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CONCLUSION
Credit Rating is thus the need of the time since investors should be equipped with easy methods to make their investment decisions. If ratings are assigned in a proper, systematic, transparent way, then it will be a boon for investors and will go a long way in making the investment world a safe place. It is an undisputed fact that CRAs play a key role in financial markets by helping to reduce the informative gap between lenders and investors, on one side, and issuers on the other side, about the creditworthiness of companies (corporate risk) or countries (sovereign risk). An investment grade rating can put a security, company or country on the global radar, attracting foreign money and boosting a nation's economy. Indeed, for emerging market economies, the credit rating is the key to showing their worthiness of money from foreign investors. Credit rating helps the market regulators in promoting stability and efficiency in the securities market. Ratings make markets more efficient and transparent. Ratings are opinions on creditworthiness based on objective and subjective analysis. Rating agencies play an important role in the world markets, they can best serve markets when they operate independently, adopt and enforce internal guidelines to avoid conflict of interest, and provide confidential information from issuers.
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RECOMMENDATIONS
(A) For investors
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Investors should not forget the Contract Law principle of ‘Caveat Emptor’. Caveat Emptor means ‘let the buyer beware’. It should be forgotten that everything including returns cannot be guaranteed and investments cannot be risk-free.
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Investors should observe caution while investing their money and be aware themselves before taking their investment decisions. Investors should self study the facts and information available about the investment products and the creditability of the issuers, before zeroing on their decisions.
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It is equally important for individual investors to maintain their good credit history by repaying loans on time and not breaching any rules of law in respect of investments, taxation, etc. that will go a long way in making the individual’s future secure and smooth.
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Investors must understand that the objective of assessment for IPO Grading and Credit Rating are very different; though the basis elements of the analysis are same. IPO Grading assesses factors from equity-holder's perspective and is a point in time exercise, whereas Credit Rating assesses factors from debtholders perspective and usually requires recurring surveillance over the life of the instrument.
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(B) For credit rating agencies
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CRISIL, ICRA & CARE, the three major rating agencies are handling 90%95% of the business of credit rating promoted by financial institutions who while advancing loans take the help of credit rating agencies to get the company rated. All these agencies have continued to expand their activities in recent years. They must also be updated about the reforms in the financial sector which can have a impact on the businesses of these agencies as the market is volatile in nature especially in case of debt instrument like bonds.
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Another aspect is regarding the procedure or the methodology that these rating agencies follow for rating. Sometimes companies not satisfied with rating of one agency approach use another rating agency for better rating. For this purpose the rating process or procedure followed for rating must be relevant and accurate. Rating agencies should not only take into consideration past & present performance; the projected future performance must not be ignored.
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BIBLIOGRAPHY
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Bharati V Pathak/2010/Indian financial system/ Pearson/Credit rating agencies in India/page 686 Lawrence J White/2001/The credit rating industry/An industrial organization analysis D. M. NACHANE and SAIBAL GHOSH/2004/Credit rating and bank behavior in India/the Singapore economic review Zvi Bodie, Alex kane, Alan J Marcus and Pitabas Mohanty/2009/Investments/Rating agencies/Mcgraw Hill http://www.sebi.gov.in/acts/CreditRatingAgencies http://www.sebi.gov.in/faq/ipo.html https://www.crisilresearch.com/Content/IPOs/CRISIL-Research_ipo-gradingrat_Coal-India CRISIL/Company Profile and Company Information/Provigator.com Crisil - Crisil India - Credit Rating Information Services of India Limited/Iloveindia.com. http://crisil.com/ratings/rating-process.html http://www.icra.in http://www.careratings.com http://www.coalindia.in
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