We can see this hike by linking the same as a means of liquidity management rather than a signal to check inflation. This move is expected to suck additional liquidity to the extent of Rs. 15,000 Crore from the banking system. This policy echoes concerns raised by Government of India on massive capital flows into the country, Reserve Bank of India (RBI) in its policy document said managing the inflow, related liquidity implications and overall stability were the biggest challenges of monetary policy. Today, in India, we face a problem of enormous capital flows. This is a completely new situation for us. Capital is welcomed but we must learn how to manage capital, how to absorb capital. Read further at this link

http://www.coolavenues.com/know/fin/gourav-policy-review-1.php

During the glowing figures on Indian economic growth. CRISIL has come out with a surprising discovery that is downgrades are exceeding upgrades for the first time in last five years. So a downturn around the corner or CRISIL playing safe in view of inability of S&P to predict subprime crisis??

CRISIL’s modified credit ratio (MCR, the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations) for the first half of 2007-08 (FH08) has dropped below 1 time — to 0.94 times — for the first time in five years. True to CRISIL’s predictions in its Ratings Round-Up for 2006-07 (FY07), the downgrades during FH08 were driven largely by the increasing risk appetite of corporate managements. Six of the seven downgrades during FH08 were due to acquisitions, or large debt-funded capacity expansions, marking a sharp reversal in the hitherto improving trend of corporate India’s credit quality.

CRISIL believes that changes in managements’ attitude towards risk will continue to drive corporate India’s credit quality. Strong financials can support increasing leverage and vaulting interest costs only to a certain extent; beyond this, aggressive acquisitions or capacity expansions will impact the creditworthiness. Successfully managing growth and integrating acquired entities, and the funding pattern for acquisitions and capacity expansions, are the other major factors that will drive credit quality over the remainder of the financial year. CRISIL expects that corporate India may also face profitability pressures going forward, on account of high input costs. This, coupled with high interest costs on account of a sharp increase in debt, may lead to pressure on companies’ profitability margins, in turn affecting credit quality.

 The declining MCR, and what it indicates: 

CRISIL’s MCR is a strong indicator of systemic credit quality, and therefore of underlying business fundamentals (refer Box 1 for a correlation between CRISIL’s MCR and key economic indicators). In FH08, CRISIL’s MCR for long-term ratings reduced to less than 1 time (to 0.94 times) for the first time in five years, from a level of 1.16 times in FY05. The MCR for FH08 reflects one upgrade and seven downgrades in CRISIL’s long-term ratings (refer Appendix 1 for CRISIL’s upgrades and downgrades of long-term ratings in FH08). The last time downgrades outnumbered upgrades was in FY03, when an MCR of 0.98 was recorded.

The decline in CRISIL’s MCR marks a reversal in corporate India’s trend of improving credit quality. The decline is in line with the view that CRISIL expressed in its Ratings Round-Up FY2006-07, that management attitude towards risk would continue to drive credit quality, with large capacity expansions affecting companies’ credit profiles.

The increasing downgrade rate, and what it means:
CRISIL’s downgrade rate (defined as the ratio of downgrades in long-term ratings to outstanding long-term ratings) increased significantly to 8 per cent in FH08 from 1.7 per cent in FY07 (refer Chart 2).

Rating watch:

CRISIL places a rating on watch when an event has occurred that has potential to impact the rating, but the impact of the event cannot be accurately assessed at the time. As on September 30, 2007, CRISIL had five ratings on watch (refer Appendix 1). Four of these were placed on watch as a result of acquisitions, or the undertaking of projects that were larger than the entities’ current size of operations. 

Standard & Poor’s Ratings Services today said that it had raised its sovereign credit ratings on the Republic of India to ‘BBB-/A-3’ from ‘BB+/B’. The outlook is stable. The upgrade to investment grade reflects the country’s strong economic prospects and external balance sheet, and its deep capital market, which supports a weak, but improving, fiscal position.

“India’s economic prospects remain strong and are rising gradually, with GDP trend growth likely to average more than
7.5% in the medium term,” Standard & Poor’s credit analyst Ping Chew said. “Gradual reforms and consistent monetary and fiscal policy stances have also sustained macroeconomic stability. This has led to strong growth prospects and attracted foreign and nonresident Indian capital. India’s strong institutions have also provided for relative stability in policy, politics, and business environments against volatility usually associated with lower income levels.”
Moreover, India’s external balance sheet is strong due to reserves accumulation and prudent debt management. Its foreign-exchange reserves, now more than 16x short-term debt and 5x gross financing requirements, provide a buffer
from changes in external and domestic investor confidence. These strengths are likely to continue, despite the current
account deficits, on the expectation of strong capital inflows.

“The upgrade also reflects an improving fiscal position. Fiscal consolidation commitments across all levels of governments look to be entrenched,” Mr. Chew said. “Governments are likely to be able to manage the fiscal vulnerabilities. India also has a well-functioning bond market, especially when compared with its rated peers and income group, providing long-term financing for the government’s deficits. The pace of deficit narrowing should continue, and faster than Standard & Poor’s initial projection. The central government’s budget deficit for the current year seems to be back on track to meet its target of 3.8% of GDP due to strong revenue collection. State governments’ fiscal estimates for the current year suggest that the combined central and state government deficit is likely to fall below 7% of GDP. The secular decline in general government deficits in the medium term is likely to continue due to tax reform and improved administrations, and implementation of fiscal responsibility laws across more state governments, currently enacted by 23 out of 29 state governments.”

Mr. Chew added: “The ratings on India, however, remain constrained by the country’s weak fiscal profile, especially its high government debt burden and deficit, which is still one of the worst among all rated sovereigns. Further rating improvements will depend on sustained prudent fiscal policy that leads to a decline in the government debt and interest burden, and further reforms that lift the country’s growth prospects and income levels. Inappropriate policy mix that increases the vulnerability of India’s still-weak fiscal flexibility, and erode external and growth strengths could lead to downward pressures on the rating.”

Post issues Infoedge will have a total 27,295,256 equity shares outstanding which will give Infoedge a valuation of Rs. 800 Cr plus. For FY 2005- 2006, Infoedge reported net income of Rs 82.4 Cr and net profit of Rs 13.29 Cr. Hence post issue Company will be valued at 10x of revenue multiple and will have a P/E of 60 which is considerable high. However Naukri.com has grown 15 times in just 4 years as in 2002 it has revenue of just Rs 3 Cr and net loss of Rs 1.1 Cr.

Naukri.com which was launched in year 1997 has emerged as one of the largest dotcom in recruitment space. Its other competitors are Monster India and TimesJobs.com. Naukri.com IPO is going to create history as it is the first dotcom IPO in India, the only other listed dotcom in India is rediff.com which is listed on NASDAQ and not in India.

This issue is going to bring huge gain for ICICI Venture as it was the first investor in Naukri.com, where it invested Rs. 7.29 Cr in year 2000.

CRISIL expects the buoyant growth performance to continue and has upgraded its GDP forecast to 8.3 percent in 2006-07 from its earlier forecast of 7.3 per cent. Agriculture, Industry and services sectors are projected to grow at 2.6, 9.2 and 10 per cent respectively.

The south-west monsoon this year has been near normal – but with distorted timeliness and geographical spread. CRISIL’s Deficient Rainfall Impact Parameter (DRIP) projects an agricultural GDP growth of 2.6 per cent for the current fiscal year. The agriculture forecast used as an input into CRISIL’s macro model leads to robust growth projections for the industrial and services sectors as mentioned above.

Subir Gokarn, Executive Director and Chief Economist, CRISIL adds, “The recently released official GDP growth numbers for the first quarter of 2006-07 surpass market expectations. They also indicate that high oil prices and a series of interest rates hikes by RBI have failed to dampen growth performance. The persistence of excellent corporate performance, strong industrial growth during July and August and impressive advance tax collections of the government lead us to believe that the growth momentum remains very strong”.

CRISIL has assigned a CRISIL IPO grade “2/5″ (pronounced “two on five”) to the proposed initial public offer of Suryachakra Power Corporation Ltd (SPCL). This grade indicates that the fundamentals of the issue are below average relative to other listed equity securities in India.

The grading reflects the revenue inflows from SPCL’s 20MW DG based power plant in Port Blair, Andaman & Nicobar (A&N) islands, under a 15 year power purchase agreement signed with the A&N Administration effective in 2003 and the revenue growth potential from its planned biomass based power plants of about 20MW each in Chattisgarh and Maharashtra.

The grading is constrained by the fact that the promoters do not have any prior experience in setting up and operating a biomass based power plant and significant raw material price uncertainty associated with biomass based power. The grading also reflects the prevalent steep costs of the company’s DG based power in A&N that would provide a strong incentive to the A&N Administration to look for cheaper alternatives.

CRISIL notes the chequered track record of the promoters in running businesses in the past – specifically that two of their companies that were engaged in the aquaculture business are now defunct. These companies, which were listed on the Bombay and Hyderabad stock exchanges in the 1993-1994 period, had large defaults on their debt obligations in the 1996-1997 period (subsequently settled at a discount) and were delisted from BSE on January 14, 2004 (the listing with the Hyderabad Stock Exchange still continues). It may also be noted that the timing of the proposed IPO is influenced by the company’s arrangement with a private equity investor, Opulent Venture Capital Trust, which currently holds a 4.7 per cent equity stake in SPCL. Opulent Venture Capital has linkages with the SREI group, which also includes SREI Capital Markets Ltd. – one of the Book Running Lead Managers for the proposed IPO.

About the company
SPCL was incorporated in February 1995. In August 2000, the company was converted into a private limited company. Subsequently, in September 2005, SPCL was re-converted into a public limited company. SPCL is the sole private IPP in A&N supplying electricity to Port Blair and surrounding villages, with its 20MW diesel based power plant, at Bamboo Flat in Port Blair. The company is setting up four biomass power projects of about 10MW each – two in Chattisgarh through separate subsidiaries and two in Maharashtra through its subsidiary, MSM Energy Ltd. The present IPO is being made to fund the Maharashtra project. For the year ended March 2006, SPCL’s consolidated net profit was at Rs 17.2 million on an operating income of Rs 891 million, as compared to consolidated net profit of Rs 20.2 million on an operating income of Rs 656.3 million in 2004-05.

About CRISIL’s IPO grading
A CRISIL IPO grade represents CRISIL’s overall assessment of the fundamentals of the issue graded in relation to other listed equity securities in India. CRISIL IPO gradings are assigned on a five-point scale from 1 to 5, with a CRISIL IPO Grade 5/5 indicating strong fundamentals and a CRISIL IPO Grade 1/5 indicating weak fundamentals. A CRISIL IPO grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security.

 According to Standard & Poor’s credit analyst Kim Eng Tan, the action reflects the possibility of sustained deterioration in the political situation in Thailand arising from an overnight military coup.

“A caretaker government has ruled Thailand since April 2006, following an election that failed to produce a government in accordance with the country’s Constitution,” said Mr. Tan. “Failure to return to civilian rule in accordance with the Thai Constitution in the near term would not only extend the existing state of policy paralysis, but also severely affect the country’s investment climate,” he added.

Mr. Tan explained that the political uncertainties arising from the coup, with the possible postponement of an election expected in November of this year, could impair creditworthiness—although fiscal and external flexibility provide a buffer, at least in the short term.

“If prolonged political uncertainty and diminished investor confidence undermine effective decision making and the government’s economic and financial strengths, a negative outlook or a downgrade is likely,” Mr. Tan noted. “A fairly rapid return to civilian rule in accordance with the country’s constitution and renewed commitment to macroeconomic stability and needed reform likely would lead to the affirmation of existing ratings,” he concluded.

“The rating on Temasek continues to reflect its leading market positions in most business segments, its high degree of investment diversity and liquidity, its above-average consolidated financial profile, and its exceptionally strong flexibility as a holding company,” said Standard & Poor’s credit analyst Greg Pau. The rating also benefits from its strong shareholder, the Ministry of Finance of the government of Singapore (AAA/Stable/A-1+).

Market position and cash flow generating ability of the prominent Temasek-linked companies remain very strong in the telecommunication, banking, transportation, infrastructure, and engineering segments, despite intensifying competition and high fuel prices. These companies together account for two-thirds of Temasek’s investment portfolio. Temasek’s investment portfolio is highly diversified, with over 20 listed companies and the three largest assets contributing to 31% of total investment value of Singapore dollar (S$) 129 billion (US$81.7 billion).

Temasek made S$21 billion of new investments and monetized S$13 billion of its portfolio in the fiscal year ended March 31, 2006. Despite net spending for acquisitions in the fiscal year, Temasek continues to demonstrate a relatively prudent investment approach. The new investments are assets located predominantly in emerging Asia and mainly in the banking and telecommunication sectors. As a result, the group’s exposure in emerging Asia has increased to 34%, in line with its long-term target of one-third of its portfolio.

“These investments continue to focus on revenue-generating assets with leading positions in their respective markets and strong cost efficiency,” said Mr. Pau. “They also are among companies with better credit quality in emerging Asia.”

The increasing investments in emerging Asia are consistent with the company’s long-term target of having one-third of its investment value in each of emerging Asia, Singapore, and developed OECD countries. With Temasek intending to maintain its long-term target, Standard & Poor’s believes that its portfolio should remain above average in quality and highly diversified.

Temasek has maintained an exceptionally strong flexibility as a holding company with a net-cash position and strong liquidity. “Its investments were largely financed by strong dividend flows from Temasek-linked companies and proceeds from disposal of its investments,” noted Mr. Pau. Temasek’s consolidated financial profile is also strong with FFO to net debt of 60% and net debt to capitalization of 20% in the year ended March 31, 2006.

While Temasek is expected to operate independently and on a commercial basis and the government does not guarantee its financial obligations, the strength of its shareholder and the constitutional arrangements that protect the company’s reserves provide some comfort.

The stable outlook on the ratings on Temasek reflects the low likelihood of significant deterioration in the group and company level financial profiles. It also factors in its stable ownership, considered expansion program focusing on revenue-accretive assets and guided by its investment themes and long-term portfolio target.

Standard & Poor’s Ratings Services said today its ratings and outlook on Industrial Development Bank of India Ltd. (IDBI, BB+/Positive/B), a public sector bank, are not affected by the Indian central bank, Reserve Bank of India (RBI), clearing a merger proposal between United Western Bank Ltd. (UWB) and IDBI. RBI announced a moratorium on UWB on Sept. 2, 2006, and suspended its operations. The merger proposal requires IDBI to pay Indian rupee (Re) 28 (US$0.61) for each UWB share, amounting to a total of Re1.50 billion, and to assume the assets and liabilities of UWB according to the conditions in the proposal. This is the first instance in India where an acquirer bank, IDBI, is required to compensate the shareholders of a bank under moratorium. UWB’s branch network in the affluent western Maharashtra region in India and its wide depositor base is expected to boost IDBI’s distribution network and grow its retail portfolio. The Re1.50 billion purchase consideration will have a negligible impact on IDBI’s reported shareholders’ funds of Re66.59 billion as at March 31, 2006. Standard & Poor’s, however, expects UWB’s weaker asset quality to impact IDBI’s financial profile negatively. UWB’s loan quality and recovery from its Re40 billion loan portfolio is a concern, given its regulatory net NPL ratio of 5.66% as at March 31, 2006, is significantly above the peer group average of about 2%. Standard & Poor’s will continue to monitor the impact on IDBI’s financial profile.

CRISIL’s study is based on the assumption that salary and pension growth caused by the Sixth Pay Commission will be similar to that caused by the fifth, and that state governments will implement the recommendations with effect from April 2009. Consequently, in 2009-10, 2010-11 and 2011-12, salaries would grow by 15 per cent, 24 per cent, and 19 per cent, and pensions would grow by 18 per cent, 38 per cent, and 41 per cent, respectively. These increases mirror the year-on-year percentage increase experienced in 1997-98, 1998-99 and 1999-00, respectively, following the implementation of the Fifth Pay Commission’s recommendations.

With these assumptions, CRISIL projects the aggregate increase in salary and pension expenditures for state governments, over the three years to 2011-12, at Rs.1.75 trillion. Consequently, the aggregate primary deficit of states in 2011-12 will triple from Rs.0.5 trillion (CRISIL’s projection of TFC’s 1 per cent target) to Rs.1.6 trillion. According to Sreenivasa Prasanna, Head, Rating Criteria & Product Development, “These levels of deficit are very high, and may cause state governments’ credit profiles to come under severe pressure”.

There is also the question of whether the increased revenues resulting from buoyant economic conditions, and savings from ongoing workforce rationalisation programmes, will offset the impact of pay and pension revisions. CRISIL’s views on this issue are not entirely sanguine. Some state governments have not been filling up non-critical vacancies arising from retirements, and are implementing outsourcing initiatives. However, these factors have had a limited impact on cumulative salary and pension expenses, and pensions continue to rise. The buoyant economic conditions and consequent increases in state governments’ revenues may be insufficient to counteract increases in salaries and pensions; historically, governments have tended to spend more when revenues increase. Moreover, TFC had already considered a large part of this buoyancy while setting the deficit targets for state governments. CRISIL believes that any ad-hoc implementation of pay commission recommendations, without identifying sources of revenue to support expenditure increases, could severely jeopardise the states’ fiscal profiles, as seen during the late 1990s