Rating agency Crisil says the outlook for the manufacturing sector this financial year is bright and the turnaround story will continue.
Its ratings in the manufacturing sector, which saw more upgrades than downgrades in the last financial year, were expected to continue the improving trend in the current financial year, the rating agency said.
For the first time since 1996, upgrades outnumbered downgrades in Crisil's portfolio of manufacturing companies in 2002-03.
Crisil expects this trend to continue, despite the expectation that growth rates for the manufacturing sector will drop this year.
The rating agency had upgraded six companies in the manufacturing sector in this financial year, against four downgrades, Crisil executive director and chief rating officer Roopa Kudva said in Mumbai on Thursday.
The industrial growth rate is expected to be 5 per cent this financial year, lower than last year's 6 per cent. The lower growth expectation is due to the twin causes of the base effect of good growth last year and the expected slowdown in export growth rates.
A Crisil report pointed out that most companies, especially those in higher rating categories such as "AAA" and "AA", have significantly reduced their interest costs, besides steadily improving their capital structure.
It expects this combination of a reasonably optimistic business outlook and improving financial profile to result in a healthy credit ratio (ratio of upgrades/ downgrades) for the manufacturing sector in 2003-04.
Crisil is particularly bullish on the steel and cement industries, while the engineering industry is expected to post a moderate growth rate.
Domestic steel consumption is expected to grow 5-6 per cent from the previous financial year's level.
This growth in demand will be supported by the government's proposed increase in infrastructure spending, continuation of incentives for the housing industry and the expected growth in the automobiles and white goods industries.
The average gearing of steel companies increased to about three times on March 31, 2003, from around 1.5 times on March 31,1996. The interest burden nearly doubled to around Rs 3,000 crore (Rs 30 billion) in this period, affecting their net profits.
But owing to the upturn in the last financial year, the operating margins of the steel companies rated have moved up to touch a five-year high of 15 per cent. The rating agency expects the margins to improve in this fiscal year from the current levels.
It expects the demand for cement to grow by 8-9 per cent in 2003-2004 because of the large demand for housing as well as the increasing investments in infrastructure. The capacity utilisation of cement companies is likely to improve too.
Cement industry ratings have been relatively stable since 1999-2000 with just one rating change in 2002-03 -- Madras Cements was downgraded from "AA" to "AA-". The rating outlook on all cement companies remain stable, according to Crisil.
The engineering industry is expected to post a moderate revenue growth of about 5-6 per cent in 2003-2004.
No significant improvement is likely in the rated companies' profitability levels, although absolute profits would improve in line with revenues.
The higher accruals are likely to be used for further debt reduction. The outstanding ratings in the sector are expected to remain stable at their present levels.
Good times