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Expanding India’s Corporate Bond Market ‘ CRISIL A’ Rated Companies – An Emerging Opportunity

Expanding India’s Corporate Bond Market ‘ CRISIL A’ Rated Companies – An Emerging Opportunity. Roopa Kudva Managing Director and Chief Executive Officer CRISIL. March 7, 2012. Key messages. Building blocks for A rated debt issuances falling in place, though gradually

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Expanding India’s Corporate Bond Market ‘ CRISIL A’ Rated Companies – An Emerging Opportunity

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  1. Expanding India’s Corporate Bond Market‘CRISIL A’ Rated Companies – An Emerging Opportunity RoopaKudva Managing Director and Chief Executive Officer CRISIL March 7, 2012

  2. Key messages • Building blocks for A rated debt issuances falling in place, though gradually • CRISIL has significantly expanded ratings coverage to over 8500 companies • Stable default and transition performance information over a decade enhances confidence • This is leading to increasing debt issuances over the past few years, though slowly • ‘CRISIL A’ rated companies display healthy credit quality • ‘CRISIL A’ rated portfolio has over 500 companies and is well-diversified • Established businesses and cost-efficient operations reflect business strengths • Well-experienced management teams that have negotiated several business cycles • Moderate debt levels enhance their resilience to downturns • ‘CRISIL A’ rated papers offer higher risk-adjusted returns • Adjusted for default risk, ‘CRISIL A’ rated companies provide excess returns of 110 basis points • Regulatory support and usage of CDS can further expand issuance

  3. Building blocks for ‘A’ rated debt issuances falling in place, though gradually 3

  4. Significantly expanded ratings coverage in ‘CRISIL A’ category Increase in number of 'CRISIL A' rated entities Shift in CRISIL's rating distribution • CRISIL’s rated portfolio has expanded to over 8500 companies today from 344 as on March 31, 2007 • ‘CRISIL A’ rated portfolio has increased to over 500 from 16 as on March 31, 2007 • Expanded ratings coverage fulfills a critical need of information availability and performance track record for the investors

  5. More than a decade of low default rates and high stability rates • ‘CRISIL A’ rated credits have displayed low default rates over the past 11 years • Steady improvement in stability rates of ‘CRISIL A’ rated credits to nearly 90% • Long track record of stable ratings performance provides comfort to investors Trend in Stability rates of 'CRISIL A' rated borrowers • * Stability rate indicate the probability of ratings remaining in the same rating category over a 1-year period

  6. ‘CRISIL A’ category ratings: Credit quality on an upward trend Upward bias in 'CRISIL A' category ratings Higher proportion of positive outlook in 'CRISIL A' category ratings • Upgrade rate of ‘CRISIL A’ ratings has been higher than downgrade rate for the past five years • Higher proportion of positive outlooks in ‘CRISIL A’ category reflect continued expectation of positive bias in the rating transition going forward

  7. Increasing share of issuances in the debt market, though still low New bond issuances in 'A' and 'BBB' categories Source: Prime Database • Share of bond issues rated in ‘A’ and ‘BBB’ categories have seen a positive trend in the last few years • Overall share still remains around 10% of bond issues

  8. ‘CRISIL A’ rated entities that issued bonds in the last three years

  9. ‘CRISIL A’ rated companies display healthy credit quality 9

  10. Well diversified portfolio of ‘CRISIL A’ rated players Rating distribution of ‘CRISIL A’ rated category ‘CRISIL A’ rated portfolio is well diversified across sectors No of ratings in ‘CRISIL A’ category: 507

  11. Successfully negotiated business cycles Healthy revenue growth and resilientoperating margins Prudent working capital management • Fairly large average revenue base of Rs.5 billion, growing at 24 per cent annually, indicates established market position • Relatively steady margins across business cycles indicate resilience in profitability • Prudent working capital management indicates efficient operations • Despite these strengths, challenges of moderate bargaining power and relatively higher concentration risks exist • Around one-third of the companies have high concentration risks, while the rest have moderate to low concentration risks. * Working capital cycle = Debtor days + Inventory days – Creditor days 11

  12. * Adjusted gearing = Adjusted debt / Adjusted networth Gaining on financial strength Healthy and improving capital structure Stable capital intensity • Healthy capital structure with a gearing of 0.5 times as on March 31, 2011 • Strengthening financial profile indicated by consistent improvement in gearing • Moderate and stable capital intensity should aid in sustaining financial strength 12

  13. Healthy financial metrics * The above numbers represent the range of the medians of the various parameters during the three year period The median values have not seen a significant deviation despite the financial downturn witnessed in 2008

  14. Demonstrated management track record over business cycles 62% of the ‘CRISIL A’ rated companies were established before economic liberalisation 14

  15. Typical characteristics of ‘CRISIL A’ rated players Well established market position albeit not sector leading Business risk profile – Sustained through cycles Cost efficient operations offset limited pricing flexibility Improving diversification offsets concentration risks Stable capital intensity and healthy capital structure ‘CRISIL A’ rated portfolio Financial risk profile – Gaining strength Improving financial flexibility to raise funds Established presence with a track record Management competency - Long track record Strong support from group or parent 15

  16. ‘CRISIL A’ rated papers offer higher risk-adjusted returns 16

  17. ‘CRISIL A’ rated entities offer higher risk-adjusted returns Risk-adjusted returns on 3-year paper Market yield refers to a three-month average of daily quoted spreads in CRISIL bond matrix- a widely used benchmark for valuation of debt investments Required yield refers to the yield required to cover expected and unexpected loss, including default risk • Excess return over required yield is 110 bps for ‘CRISIL A’ category and is higher than that for ‘CRISIL AA’ category • Risk adjusted return based on: • Robust and extensive default database covering 25 years of rating performance • Factors market yields, expected losses emanating from potential defaults and return on capital maintained by investors

  18. The way forward 18

  19. Regulators can lead the way forward • Regulations need to permit investments in ‘A’ category instruments • IRDA regulations currently permit insurance companies to take board approval to invest in ‘A+’ rated debt • Stronger long-term performance should provide confidence to regulators to allow investors to expand their investment basket • Credit Default Swap (CDS) can catalyse investor interest in lower rated bonds • Represents a tool to offset additional risks • RBI has taken the first step by issuing regulations • Other regulators need to follow suit to allow insurance companies, pension funds, provident funds and mutual funds to use CDS effectively • Investors need to show active interest in credits rated below ‘AA’

  20. Well established market position but may not be sector leading Market leader in niche industries Established market position • VIP Industries Ltd • (CRISIL A+/Stable/CRISIL A1) • World’s fifth largest luggage manufacturer • Domestic market share of 75% in economy segment and 15% in premium segment • Only major Indian brand in the largely fragmented luggage market • Piaggio Vehicles Ltd • (CRISIL A+/Stable/CRISIL A1+) • Leading player in the domestic three-wheeler market • Enjoys a strong market position with a domestic market share of 37% • Strong market position backed by pan-India distribution network and diverse product offerings • Netafim Irrigation India Pvt Ltd • (CRISIL A+/Positive/CRISIL A1+) • One of the leading players in the micro-irrigation industry in India • Enjoys market share of 15-20%; market position supported by wide distribution network of 600 dealers • Established market position in AP, Gujarat and Maharashtra; expected to improve its penetration in Tamil Nadu, Karnataka and Punjab • Manugraph India Ltd • (CRISIL A+/Stable/CRISIL A1+) • Established player in single-width web offset printing machines; Strong market position in both domestic and export markets • Market leader in the domestic market with a share of 60% • Acquisition of US-based Dauphin in 2006 has enabled it to achieve strong market position globally 21

  21. Cost efficient operations offset limited pricing flexibility • Titagarh Wagons Ltd • (CRISIL A+/Positive/CRISIL A1+) • Established wagon manufacturer • Healthy operating profit margins (17.1% in 2010-11) supported by integrated operations, cost reduction initiatives and strong relationships with suppliers • Strong operating efficiency partially offsets low pricing power due to bid-based orders from Indian Railways and low product differentiation • Amar Ujala Publications Ltd • (CRISIL A/Stable/CRISIL A1) • Leading player in publications business; Flagship publication is among the top four Hindi dailies • Enjoys healthy operating profitability (at 17.3% in 2010-11) due to cost efficient operations • Strong operating profitability emanates from economies of scale, owned facilities and adequate printing capabilities • LancoTanjore Power Company Limited • (formerly Aban Power Company Ltd ; CRISIL A+/Stable) • Independent power producer • Enjoys high operating efficiency with plant load factor of 75% and high performance efficiency parameters better than benchmarks set in the PPA. • Performance linked recovery of fixed costs results in healthy RoCE; High operating efficiency and comfortable liquidity partly offsets counter party risks related to TNEB • Eastern Condiments Pvt Ltd • (CRISIL A/Stable/CRISIL A1) • Leading player selling spices under the Eastern brand • Enjoys healthy operating efficiencies driven by its raw material sourcing network and ability to manage its receivables efficiently; operating profit margins averaged at a healthy 15% over the past five years • This has enabled the company to manage the volatile raw material prices and moderately intensive working capital requirements 22

  22. Improving diversification levels offsets concentration risks Improving levels of diversification Well diversified players • Rashtriya Chemicals & Fertilisers Ltd • (CRISIL A+/Positive/CRISIL A1+) • Manufactures urea, complex fertilisers and industrial products • Well diversified revenue mix – Urea (42%); Complex fertilizer (20%); Industrial products (9%) and trading (28%) in 2010-11 • While urea is completely regulated, complex fertilisers segment is partly regulated and industrial products segment is fully market-driven. Diversity in product profile protects it from unfavorable conditions in any one of the segments. • INOX India Ltd • (CRISIL A+/Stable/CRISIL A1) • Leading manufacturer of cryogenic tanks • Diversification levels (both product and geography) improved with the acquisition of US based Cryogenic Vessels Alternative (CVA) in December 2009; CVA has its manufacturing units at Texas with presence in Canada and China • Acquisition helped it to diversify product profile and geographic spread • Century Enka Ltd • (CRISIL A+/Stable/CRISIL A1+) • Manufactures industrial and textile yarn fabric • Diversified revenue profile – Nylon tyre cord fabric (36%); Nylon filament yarn (24%); and Partially oriented yarn (40%) in 2010-11 • Diversified product portfolio insulates profits from downturn in any one division • Luminous Power Technologies Ltd • (CRISIL A+/Positive/CRISIL A1) • Leading manufacturer of Inverters, UPS and batteries in India • France-based Schneider Electric SA acquired 74% in Luminous for Rs. 14 billion in June 2011 • Acquisition will enable Luminous to leverage synergies with the parent and diversify into home electrical space 23

  23. Financial risk profile : Gaining strength Ability to raise funds through multiple avenues Stable capital intensity and healthy capital structure • Sharda Motor Industries Limited • (CRISIL A/Stable/CRISIL A1) • Established auto ancillary player with a strong presence in exhausts and suspension products • Prudently halved its capex during the 2008-09 downturn • Prudent capex management has enabled the company to maintain its capital structure at around 1 time despite steep fall in profitability • Ashoka Buildcon Ltd • (CRISIL A+/Stable/CRISIL A1) • Established player in construction business • Raised Rs. 2.25 billion through IPO in October 2010; this accounted for 65% of reported networth as on March 31, 2010 • Equity infusion coupled with healthy performance has enabled gearing to improve to 0.52 times as on March 31, 2011 from 1.18 times as on March 31, 2008 • Walchandnagar Industries Ltd • (CRISIL A+/Positive/CRISIL A1+) • Well established and diversified heavy engineering project execution company • Healthy financial risk profile with gearing of 0.5 times as of March 31, 2011 • Prudent capital intensity has enabled the company to maintain gearing that has never exceeded 0.6 times over the past three years • PVR Ltd • (CRISIL A+/Stable) • Strong player in film exhibition business • Raised equity of Rs. 1.9 billion over the past three years; this is in addition to its IPO of Rs.1.28 billion in 2005-06 • Ability to raise equity during the growth phase has enabled the company to maintain comfortable gearing at less than 0.6 times (over the past 3 years) 24

  24. Other subsidiaries of Volkswagen AG in India include Volkswagen Group Sales India Pvt Ltd ( rated CRISIL A+/Positive/CRISIL A1) and Skoda Auto India Pvt Ltd(rated CRISIL A+/Positive). Established management competency with demonstrated track record and strong support Strong group/ parent support Demonstrated track record • Camlin Ltd • (CRISIL A+/Stable/CRISIL A1) • Established player in branded stationery segment • Set up in 1931 by Mr. DigambarDandekar • In May 2011, Kokuyo & Co – a leading 100-year old Japanese company – acquired majority stake in Camlin from the Dandekar family • Tata Sky Ltd • (CRISIL A/Stable/CRISIL A1) • Subsidiary of Tata Sons Ltd (‘CRISIL AAA/FAAA/Stable/A1+’) • Enjoys strong operational and financial support from parent – Tata Sons Ltd • Second largest player in Direct-To-Home market; strong support from parent has enabled the company to pursue aggressive growth plans • Lokmat Media Pvt Ltd • (CRISIL A+/Positive/CRISIL A1+) • Established in 1918; one of the oldest publication companies. • Flagship publication ‘Lokmat’ is the sixth largest read daily in India • Enjoys largest readership in Maharashtra • Volkswagen India Pvt Ltd • (CRISIL A+/Positive/CRISIL A1) • Subsidiary of Volkswagen AG, second largest global car player with revenues of Eur 159 billion in 2011 • Strong support from parent in all aspects - product development, financial and marketing • Strong parent support has enabled Volkswagen group to achieve 5% market share in the intensely competitive domestic passenger car industry 25

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