Credit Rating Reports: A Complete Guide for Stock

Investors
drvijaymalik.com/use-of-credit-rating-reports-in-stock-analysis/

August 9, 2015

The current article focuses on the importance of credit rating reports for stock investors.
The article covers the example of one company to highlights the reasons why we believe
that credit rating reports put investors at an advantage in their analysis. The article also
contains clarifications on credit rating reports sought by readers like:

How to interpret the suspension/withdrawal of credit rating of a company by the

credit rating agency?
Why the data of debt contained in the credit rating report is different from the data in
the annual report?
Should an investor completely rely on credit rating reports?
Is there a conflict of interest as the company pays for credit rating reports?
Where to get the credit rating reports from?
Is a credit rating report mandatory for companies?

The current article will serve as a complete guide to help investors use to make credit
rating reports an integral part of their stock analysis.

Credit rating agencies are independent third-party organizations approved by market

regulators, which provide an opinion about the credit strength of any borrower or its debt
instrument in the form of credit rating reports. Their role has been widely ingrained in debt
markets as the pricing of loans/debt facilities to any borrower is based on its credit
strength.

Almost all the lenders use the credit ratings assigned by such independent credit rating
agencies for their appraisal and pricing of the borrowing entities. Similarly, debt market
participants decide about the sufficiency of yield being offered on market instruments like

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non-convertible debentures (NCDs) or commercial paper (CPs) by issuing companies by
looking at their credit rating.

In India, there are many approved credit rating agencies. Some of the popular ones are
CRISIL (an alliance of Standard & Poor’s), ICRA (an alliance of Moody’s), India Ratings
(Ind-Ra, an alliance of Fitch), CARE (owned by Indian Financial Institutions), Brickwork
etc, which are very active in assigning credit ratings and preparing credit reports in Indian
financial markets. Detailed credit rating reports are available only to their paid
subscribers; however, summary credit reports are available publically on their website
and serve a good purpose for retail investors.

How to download Credit Rating Reports

The best way to get credit rating reports is to search “Company name Credit Rating” on
the internet/Google. The first few results will tell the investor whether the company is
rated and if yes, then which credit rating agency has rated it. After that, the investor
needs to go to the website of the credit rating agency, enter the company name in the
search field on the website and then download the summary reports available at the
credit rating website. The summary credit rating reports of 2-5 pages are available free to
the public. The paid reports are about 8-20 pages long. However, until now, free reports
have sufficed our requirements.

A few credit rating agencies, provide all the historical ratings on their website. So it
becomes easy to get them. However, other agencies like CARE, keep only last 2 years
credit rating reports and remove older reports from the public domain. In these cases,
searching online to check whether older reports are uploaded on any other site like stock
exchanges, moneycontrol etc. might help. Else, the investor might have to buy the reports
from the agencies. Alternatively, investors may try contacting the company investor
relations dept. to check if they can provide historical reports to the investor.

Credit ratings vary on a spectrum of AAA to D where AAA means strongest credit
strength/lowest possibility of default and D means lowest credit strength/already defaulted
on repayment obligations. Various credit ratings are AAA,
AA+,AA,AA-,A+,A,A-,BBB+,BBB,BBB-,BB,B and D. As we move from AAA to D, the
credit risk increases and the possibility of the borrower defaulting on its debt servicing
obligations increases.

As mentioned above, investors in debt markets make extensive use of credit ratings.
Credit ratings have been predominantly thought as relevant for debt market participants;
however, I believe that they provide a very insightful avenue for equity investors as well.

There are many reasons, which make me believe that every stock market investor should
read the credit rating report of her target company. She should not restrict herself to the
latest credit rating report, but read all the historical credit rating reports available in the
public domain and understand the story of the movement in the credit profile of the target
company.

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Let us first understand the critical features that credit rating reports contain, which are
helpful for equity analysts and then analyse the credit rating reports for a sample
company as a case study to establish its importance.

A credit rating report provides the following important inputs:

Benefits from reading Credit Rating Reports

A) Important Business Details and its Key Strengths & Weaknesses:

The credit rating report serves as a key resource of business information, which has been
verified by a third party. Many times, a company does not disclose many of these details
on its website or in its annual report considering them as sensitive information.

Such information might include market position, kind of relationships with different
stakeholders, business characteristics, comparative positioning of its brands, status of its
competitors, details of key customers and its business strategy.

Credit reports also contain details about the factors leading to the business advantage of
the company (MOAT), capacity utilization levels, future expansion plans and updates of
ongoing plant constructions/debottlenecking including the status of financial closure of
such expansions.

B) A Glimpse into the Critical Confidential Information:

This is one of the reasons; I read credit rating reports of all the companies I analyse.

Credit rating analysts have access to most of the information privy only to the company
management, which is not available in the public domain but is critical to assess the credit
strength of any company. A summary/glimpse of critical sections of such information,
which every investor can get in the credit report, sometimes tilts the investment decision
in a company’s favour or against it.

Such information might include terms of contracts & agreements with buyers & suppliers
including cost escalation clauses & formulas, contingency clauses etc., plant capacities &
their utilization levels with sales volumes etc.

An equity investor or equity research analyst would not get an opportunity to go through
these contracts, unlike the credit rating analysts.

C) Key Factors affecting Company’s Performance including Key Risks

that it might face going ahead:
Credit rating agencies based on their knowledge of the industry, peers and company
analysis, provide the users with a snapshot of key parameters that are expected to affect
the performance of the company. Agencies also highlight the key risk factors that might

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impact the performance of a company negatively, which should be monitored carefully by
the investors.

D) Another Independent Opinion apart from the Statutory Auditor, on the

Company’s Financial Position:

Credit rating reports are prepared by financial analysts who analyse the company’s
financial information including annual reports while preparing the reports. It serves as
another check for the investor that another independent third party has checked the
financial information apart from the company’s statutory auditor.

E) A Third Party Verification of Investor’s Analysis:

Credit rating might serve as an independent benchmark for an investor to compare her
analysis. E.g., if an investor believes that the fundamental position of her target company
has improved over the years but on the contrary, finds that the company’s credit rating is
going down, then she should recheck her analysis to find out the reasons for such
disparity.

F) Year on Year Credit Rating Movement: Good Proxy for the

Performance:

If an investor notices that the credit rating of a company has improved over the years e.g.
from BBB- to A+, then she can be reasonably certain that the company has shown good
business performance and as a result, its fundamental strength has improved.

G) Rather than a Rating, it’s the Movement of Credit Rating that is More
Important:

This is a critical point. I believe that an investor should focus more on the direction of
movement of the credit rating of any company rather than its absolute credit rating level.
This is not to say that the absolute level is irrelevant. However, I would look favourably at
a company “A” whose credit rating has improved from BBB- to A- over the years than
another company “B” whose credit rating has deteriorated from AA+ to A over the years,
even though the current credit rating of company B is higher than that of company A.

A Case Study of learning from Credit Rating Reports

Oriental Carbon & Chemicals Limited, an Indian insoluble sulphur manufacturer, has been
rated by credit rating company ICRA Limited. Credit rating reports of Oriental Carbon &
Chemicals Limited from 2008 are available on the website of ICRA Limited. (Link)

2008: BBB
2009: BBB
2012 (March): BBB+ (rating watch with negative implications)
2012 (September): BBB+ (stable outlook)
2013: BBB+ (stable outlook)

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 2014: A- (stable outlook)
2015: A (stable outlook)

The following has been the financial performance of Oriental Carbon & Chemicals Limited
over the last 10 years:

Now let us analyse the key information that credit rating reports of Oriental Carbon &
Chemicals Limited have to provide to the stock market investor, which makes studying
these reports essential for the stock market investor both as part of initial appraisal as
well as regular monitoring exercise.

A) Important Business Details and its Key Strengths & Weaknesses:

1) Company Background:
The 2008 credit rating report has the following gist as company background, which
summarizes its entire history of Oriental Carbon & Chemicals Limited in a few words:

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 “Oriental Carbon & Chemicals (OCCL) was incorporated in 1978 as Dharuhera
Chemicals Limited (DCL) and in 1983 DCL was merged with Oriental Carbon
Limited (OCL), a group company engaged in the production of Carbon Black, to
form OCCL. Since 1980, DCL’s Chemicals & fertilizers division in Dharuhera was
engaged in the production of sulphuric acid, oleum, single super phosphate (SSP),
sodium silico fluoride and stabilized liquid sulphur.

However, the fertilizer business was deemed unviable; the company exited from the
fertilizer business in 2001, and Sulphuric Acid & Oleum production was retained. In
1994, OCCL had set-up a manufacturing facility for the production of Insoluble
Sulphur, which is now the flagship product of the company. In 2000, the company
realigned its focus to concentrate on Insoluble Sulphur and in the process divested
its Carbon Black Unit in favour of Continental Carbon Company of USA.

OCCL has a production capacity of 10,000 metric tonnes per annum (MTPA) for
Insoluble Sulphur and 41,250 MTPA for Sulphuric Acid & Oleum.”

2) Market Position, Comparative Positioning of Brands, Status of its Competitors:

Credit reports of ICRA Limited provide an investor with a gist of the market standing of
Oriental Carbon & Chemicals Limited viz-a-viz its competitors.

2008:

“OCCL enjoys a dominant market position in the domestic market by virtue of being
the only local manufacturer of Insoluble Sulphur in the country. It also enjoys a
favourable market position as the ‘Second Alternate Supplier’ in the global industry,
which is dominated by Flexsys of USA..”

3) Relationships with Stakeholders:

Credit reports give an investor about the kind of relationship Oriental Carbon & Chemicals
Limited has with its customers.

2012 (September):

“The reaffirmation of the ratings reflects long track record of OCCL in the business
of producing Insoluble Sulphur (IS), its established market position in the domestic
industry by virtue of being   the leading domestic manufacturer of IS, and strong
customer base comprising major tyre manufacturers across the world and long-term
relations with them.”

4) Details of key customers:

The reports provide an investor with key informations about the customers of Oriental
Carbon & Chemicals Limited, which many times are not disclosed by the company on its
website or its annual report as it might consider it as sensitive information:

2008:

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 “…with strong customer base comprising major tyre companies  in  the world  like
Continental  AG, Goodyear, Bridgestone, Kumho Tyres etc. for exports  and Apollo 
Tyres, Bridgestone, J K Tyres, MRF Tyres, Ceat Tyres, Goodyear India, Birla Tyres
etc in the domestic market.”

2015:

“The company’s customer base comprises almost all major tyre manufacturing
companies of the world with whom it enjoys long standing relationships”

5) Business strategy:
Credit reports of Oriental Carbon & Chemicals Limited provide an investor with the critical
summary of the business strategy being followed by the company. These inputs can be
very vital while understanding the business of the target company and thereby taking the
investment decision.

2008:

“In order to move away from the commoditized nature of the product, OCCL  has 
ventured into manufacturing of tailor made grades of Insoluble Sulphur, which
command a premium over conventional grades of Insoluble Sulphur as the
European markets are witnessing a shift from conventional grades to value-added
grades of Insoluble Sulphur

OCCL is also engaged in the production of Sulphuric Acid & Oleum, which
constitutes about 20% of the total sales of the company. Since these products are
sold to selective customers locally, the company doesn’t compete with larger
players in the industry.”

2013:

“OCCL is steadily focusing on increasing the share of value-added grades of

Insoluble Sulphur, which command a premium over the conventional grades.”

6) Factors leading to the Business Advantage of the Company (MOAT):

Credit reports of Oriental Carbon & Chemicals Limited, provide a glimpse into whether the
company has a sustained business advantage over its peers and if yes, then what are the
key factors leading to such advantage:

2013:

“Closely guarded technology, capital-intensive nature of the business, hazardous

nature of Sulphur and long gestation period of about one and half years involving
quality checks and approvals from the tyre manufacturers for commercial
production act as the entry barriers for other players in the industry”

2008:

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 “OCCL was engaged in the production of Carbon Black which was hived off to
Continental Carbon Limited in 2000 but the company continued to benefit from the
business relations with tyre companies in the country”

7) Capacity utilization:

Many times, companies might not disclose the capacity utilization levels, considering it a
piece of sensitive information. An investor might get such information as part of the credit
rating reports.

2013:

“In 2012-13, the company set up a greenfield project at Mundra SEZ with a capacity
to produce 11,000 MTPA of IS. The capacity utilization remained moderate at 81%
in FY13 on the back of subdued demand from Europe, the key market for OCCL.”

8) Future Expansion Plans, updates of Ongoing Plant Constructions/Debottlenecking and Status of

Financial Closure of such expansions etc.:

This is one essential section of the company’s performance, which is usually provided in
credit reports of all the companies. It provides the investor, most of the information
required to assess the project execution capability of the company’s management & its
track record, including any delays, overleveraging etc.

2008:

“OCCL has recently undertaken a debottlenecking project which would enable the
company to increase its existing capacity  marginally by January 2009.

Going forward, OCCL plans to set up a manufacturing facility in Mundra SEZ. The
company expects to benefit from savings from freight for servicing of export orders
and other fiscal benefits on account of operations based in SEZ.

The capital outlay for the project is expected to be around Rs 750 million, which is
significant in comparison to the current size of the company and exposes the
company to project execution risk. However, the project is yet to achieve financial
closure.”

2009:

“The company is expected to implement the project in two phases. In the first
phase, the company would set up the facility with the capacity to produce 5,000
MTPA which can be expanded to 10,000 MTPA in the second phase of the project.

Out of total capex of Rs. 750 million for the phase I, OCCL plans to raise term loan
of around Rs. 500 million, while the rest would be funded through internal accruals.
The company expects to achieve financial closure for the project by January 2010
and the commercial production is expected to start from July 2011.”

2012 (March):

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 “The ratings, however, are constrained….residual project implementation risk for
the phase II of the Mundra Special Economic Zone (SEZ) project; which is partly
mitigated by the successful commissioning of the phase I without material time or
cost overrun and advanced stage of the phase II.”

2012 (September):

“OCCL had a production capacity of 12,000 metric tonnes per annum (MTPA) for
Insoluble Sulphur (IS) and 41,250 MTPA for Sulphuric Acid & Oleum as on March
31, 2011. However, the production capacity of IS has increased to 23,000 MTPA
post completion of Phase II of Mundra greenfield project in May 2012.”

B) A Glimpse into the Critical Confidential Information:

As mentioned earlier, this is one of the most important reasons; I read credit rating reports
of all the companies I analyse.

Credit rating analysts have access to most of the information privy to the company
management, which is not available in the public domain but is critical to assess the credit
strength of any company.

Credit reports of  Oriental Carbon & Chemicals Limited, over the years, have provided
key inputs, which help the investor understand the evolution of the business of the
company over the years.

2008:

“OCCL’s inability to pass on the price increase in the past has negatively impacted
its performance. Although the company has now taken measures to pass on the
price increase by entering into quarterly contracts instead of annual contracts with
customers, yet it remains exposed to fluctuations in the prices.”

2009:

“ICRA also notes that the sharp fluctuations in raw material (Sulphur  and  other
petroleum derivatives) prices had adversely impacted the profitability of the
company  during  2007-08; however, the company has taken measures to pass on
the raw material price rise to the customers in a timely manner, which is reflected in
the improvement in the profitability of the company  during 2008-09.

Since 2008-09, the company started entering into quarterly contracts instead of
annual contracts with customers to provide itself the flexibility to pass on the raw
material price increase. This has resulted in significant improvement in the
profitability of the company in the last one and half years.”

These inputs have helped the investors understand the sudden change in the operating
profitability of Oriental Carbon & Chemicals Limited

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We can notice in the financial details of Oriental Carbon & Chemicals Limited that the
operating margins, which declined from 18% in FY2006 to 12% in FY2009, improved to
32% in FY2010 and have been stable at about 25% since then. Therefore, the
explanation for sudden improvement and stabilization of margins of OCCL can be found
in the credit rating report.

2013 (November):

“In FY13, exceptional profit on the sale of Tarapur land along with reversal of profits
has helped company to report net profit.”

This critical input helps investors understand the reasons for the improvement in the
margins of Oriental Carbon & Chemicals Limited in FY2014.

2014:

“The revision of the long-term rating reflects the increase in scale of operations of
the company attributable to rise in sales volumes of Insoluble sulphur (IS) aided
primarily by more approvals from overseas customers….”

2015:

“….the company’s products are making inroads into the hitherto untapped but large
markets like the US where tyre manufacturers have been receptive in a bid to
diversify their suppliers from the one or two that they currently rely on for IS
Supplies; the increase in scale of operations of the company attributable to rise in
sales volumes of IS primarily due to more approvals from overseas customers…”

C) Key Factors affecting Company’s Performance including Key Risks that it might
face going ahead:

Credit reports of Oriental Carbon & Chemicals Limited help an investor understand the
key factors influencing the business performance of the company including the key risk
parameters that need continuous monitoring by the investors.

1) Influencing Factors:
2008:

“The company is expected to benefit from the favourable prospects in the tyre
industry driven by radialisation of tyres as Insoluble Sulphur is a key ingredient for
vulcanisation of rubber.”

2012 (September):

“Going forward, the ability of OCCL to achieve optimal capacity utilisation for
Mundra plant in view of modest demand prospects and efficiently managing the
higher working capital requirements along with the improvement in operational
performance of SDL would be key rating sensitivities.”

2) Risk Factors:

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2009:

“The ratings, however, are constrained by the cyclical nature of the business and
the high capital intensity of the business leading to moderate return indicators in the
past. ICRA also takes note of the primarily debt-funded capital expenditure (capex)
plan of OCCL to set up a green-field IS plant at Mundra Special Economic Zone
(SEZ). As the capex plan is large in relation to current balance sheet size of OCCL,
the company is exposed to  significant  project implementation risks.”

2012 (March):

“The rating watch follows the recent announcement of acquisition of 50% stakes in
Schrader Duncan Limited (SDL) by OCCL. The acquisition of relatively weaker
entity SDL, which may become a subsidiary of OCCL, could adversely impact the
consolidated financials of the company.

2012 (September):

Post-acquisition, OCCL has also provided guarantees for the bank limits of SDL,
which ICRA has factored in while reaffirming the ratings. ICRA notes that, while the
acquisition of SDL, a financially weaker entity, would modestly impact the
consolidated financials of the company, its consolidated credit profile will not be
materially impacted because of the anticipated comfortable cash generation from its
own operations, which will render its key coverage metrics well within the current
rating category.”

D) Another Independent Opinion apart from the Statutory Auditor, on the

Company’s Financial Position:

The fact that a company’s financial statements have been analysed by a reputed credit
rating agency of repute, which has not made any adverse comment about its accounting
policies, provides another independent check about the quality of accounting practices
being followed by Oriental Carbon & Chemicals Limited.

E) A Third Party Verification of Investor’s Analysis:

Oriental Carbon & Chemicals Limited has witnessed a continuous improvement of

revenue, profits, margins and reduction in debt over the years. Alongside, the
improvement of the credit rating of Oriental Carbon & Chemicals Limited from BBB to A
serves as a check that the fundamental position of the company has indeed improved
over these years.

F) Year on Year Credit Rating Movement: Good Proxy for the Performance:

As mentioned above, the improvement of the credit rating of Oriental Carbon &
Chemicals Limited from BBB in 2008 to A in 2015, serves as a piece of vital evidence that
the company has been performing well financially & operationally, thereby leading to
improvement in the fundamental position of the company.

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Thus, we can see that the even the summary credit reports of Oriental Carbon &
Chemicals Limited provided publically by ICRA Limited on its website contain very vital
pieces of information, which might or might not be available to investors from the
company website, its annual reports, equity research reports or other public sources.
These inputs help an investor understand the business of Oriental Carbon & Chemicals
Limited in a better manner and make an informed investment decision.

Therefore, I suggest that an investor should read all the available credit rating reports of
all their target companies, including the recent most as well as the historical reports.
Reading credit rating reports will add value to her analysis and help her take better
investment decisions.

Credit Rating Shopping: How to interpret Suspension / Withdrawal

of Ratings
Sir,

In December 2016, CRISIL withdrew its rating for Avanti Feeds Ltd. I am unable to
understand if the rating was withdrawn because Avanti Feeds Ltd did not cooperate with
CRISIL:

“CRISIL had suspended its ratings on the bank facilities of AFL on June 24, 2015,
on account of non-cooperation with CRISIL’s efforts to undertake a review of the
outstanding ratings. Despite repeated requests, the company is yet to provide
adequate information to enable CRISIL to assess its ability to service its debt. The
suspension reflects CRISIL’s inability to maintain the ratings in the absence of
adequate information.”

OR because there were no outstanding dues to the bank, SBI, hence credit rating not
required?

“CRISIL has withdrawn its rating on the term loan and proposed bank facilities of
Avanti Feeds Limited (AFL) at the company’s request and on receipt of a no-dues
certificate from its bank, State Bank of India. The rating action is in line with
CRISIL’s policy on withdrawal of its ratings on bank facilities. CRISIL has placed its
ratings on the other bank facilities on ‘Notice of Withdrawal’ for 60 days at the
company’s request and on receipt of no-objection certificate from its bankers. “

I am not quite sure how to read this.

Many thanks,

Further advised reading: Analysis: Avanti Feeds Ltd

Author’s Response:

Hi,

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Thanks for writing to us!

As discussed in the workshop, in case of non-cooperation by the borrower with one

credit rating agency, investors should check whether the borrower has got credit rating
from any other competing credit rating agency.

Switching of credit rating agencies by companies is very common in the corporate world.
An investor would appreciate that there can be many reasons for the same:

Almost all the companies try to get a higher credit rating and in this attempt, many
times companies end up switching their credit rating agency to the one that
promises them a higher credit rating.
Companies may also switch credit rating agency when due to any reason, the
existing rating agency indicates to them that they may downgrade their credit rating.
In such circumstances, the companies may try to get themselves rated by another
credit rating agency, which may maintain their existing credit rating.
Additionally, companies may switch their credit rating agency to reduce their costs.
Investors would appreciate that the cost of credit rating is borne by the company. As
the credit rating agencies review their ratings at least once every year, therefore, the
credit ratings have an annual cost to the companies. In order to reduce the annual
cost of credit rating, companies may shift from a costly credit rating agency to a
cheaper credit rating agency.

In most of the above circumstances, once the company has got a favourable outcome
from the alternate/second credit rating agency, then it may stop replying to the email sent
by the existing credit rating agency asking for information for conducting a review of their
credit rating. In such circumstances, the first/existing credit rating agency puts out a
report that the company is not cooperating in providing the information and in turn, the
rating agency suspends/puts on hold the credit rating.

The second reason for the suspension of credit rating is upon the repayment of the loan
by the borrower. This is a natural event. This is because, getting the credit rating involves
cost and when companies repay their loans, then they stop getting credit-rated to save on
costs.

In case, the debt has been paid off, then investors may check the same in the annual
report. The absence of the said debt will clear your doubt regarding the suspension of
credit rating. However, in case, the debt is still there, then the investor should check
whether the company has been rated by any other rating agency. This is usually the most
common reason for suspension of credit rating.

There might be a third scenario where the company may be facing a financial/liquidity
crunch. In such a situation, none of the credit rating agencies might willing to give it a
favourable credit rating. As a result, the company stops providing information to the
existing credit rating agency, which suspends its credit rating citing non-cooperation. In
addition, the company does not get credit rated by any other credit rating agency, as no
other agency is ready to give it a good rating.

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The following case of Kanchi Karpooram Ltd is an interesting study about how a
company changed it credit rating agency in quick succession:

A curious case of credit rating shopping and then non-cooperation with credit rating agencies by
Kanchi Karpooram Ltd:
When an investor analyses the credit rating reports of Kanchi Karpooram Ltd, then she
notices that the company has indulged in credit rating shopping. It indicates that the
company kept on switching from one credit rating agency to another frequently. In this
process, the company did not share the required information with credit rating agencies
for the review of credit rating. As a result, the rating agencies labelled Kanchi Karpooram
Ltd as a non-cooperating client.

a) Kanchi Karpooram Ltd rated by CRISIL for the first time in 2014:

In April 2014, the company was rated by CRISIL for the first time, CRISIL assigned a
rating of BB+ to the company.

CRISIL has assigned its ‘CRISIL BB+/Stable’ rating to the long-term bank facilities
of Kanchi Karpooram Ltd (KKL).

b) Non-cooperation by Kanchi Karpooram Ltd with CRISIL at the very first review of the credit rating in
2015:
In July 2015, CRISIL put out a note saying that Kanchi Karpooram Ltd has not provided it
required information to review the credit rating.

CRISIL also identifies information availability risk as a key credit factor in the rating
assessment as outlined in its criteria ‘Information Availability Risk in Credit Ratings’.
CRISIL is awaiting adequate information from Kanchi Karpooram Ltd (KKL) and will
provide updates on relevant developments from time to time.

c) Kanchi Karpooram Ltd switched its credit rating agency to SMERA in Sept 2015:

In Sept 2015, the company shifted its credit rating agency from CRISIL to SMERA.
However, the company could not retain its earlier credit rating of BB+ and the new credit
rating agency, SMERA, rated Kanchi Karpooram Ltd at BB-.

SMERA has assigned a long term rating of ‘SMERA BB-’ (read as SMERA double
B minus) and short term rating of ‘SMERA A4+’ (read as SMERA A four plus) to the
above mentioned bank facilities of Kanchi Karpooram Limited (KKL).

d) Kanchi Karpooram Ltd stopped cooperating with SMERA in 2017:

In Sept 2017, the credit rating agency SMERA highlighted that Kanchi Karpooram Ltd is
not cooperating for the review of credit rating and has not provided it with the required
information.

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 SMERA has been requesting for data, information and undertakings from the rated
entity for conducting  surveillance & review of the rating. However, the
issuer/borrower failed to submit required documents before due date. This rating is
therefore being flagged as “Issuer not-cooperating”, in line with prevailing SEBI
regulations and SMERA’s policies.

e) Kanchi Karpooram Ltd switched its credit rating again from SMERA to India Ratings:

In 2017, the company has shifted its credit rating from SMERA to India Ratings. In its
credit rating report of March 2017, India Ratings assigned a rating of BB- to the debt of
Kanchi Karpooram Ltd.

India Ratings and Research (Ind-Ra) has assigned Kanchi Karpooram Limited
(KKL) a Long-Term Issuer Rating of ‘IND BB-’. The Outlook is Stable.

f) Kanchi Karpooram Ltd stopped cooperating with India Ratings in 2018:

In April 2018, India Rating highlighted that Kanchi Karpooram Ltd has not provided it
required information and therefore, it has classified the company under the non-
cooperating category.

India Ratings and Research (Ind-Ra) has migrated Kanchi Karpooram Limited’s
(KKL) Long-Term Issuer Rating to the non-cooperating category. The issuer did
not participate in the rating exercise despite continuous requests and follow-ups by
the agency.

Further advised reading: Credit Rating Reports: A Complete Guide for Stock
Investors

An investor would appreciate that such fluctuating behaviour of Kanchi Karpooram Ltd
while dealing with credit rating agencies, frequent shifting and then non-cooperation even
at the time of the first review raises many concerns about the company. An investor is left
wondering whether the company values consistent disclosure of information to outside
stakeholders in order to help them make informed decisions.

Frequent shifting of rating agencies one after another may be an attempt to get a higher
credit rating from any rating agency that may entertain the company. It might be a case
where the company tried to switch to a rating agency thinking that it may get a higher
rating; however, when it did not get the desired rating, then it stopped cooperating with
existing credit rating agency and switched to another agency.

Recently, in May 2018, CRISIL downgraded the rating of Kanchi Karpooram Ltd to B+
based on publicly available information.

Non cooperation by Issuer: CRISIL has been consistently following up with

Kanchi Karpooram Ltd (KKL) for obtaining information through emails and letter
dated, 24th April 2018, among others, apart from telephonic communication. The
issuer, however, remained non-cooperative.

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An investor may appreciate that such incidences of credit rating shopping may be an
attempt by companies to put forward a better picture of the company than the reality. An
investor should be cautious while making decisions about companies in such cases.

We believe that in most of the situations, a good analysis while selecting the stock for the
first time and then regular monitoring will be able to bring out most of the cases where a
company is facing liquidity issues.

Read: How To Monitor Stocks In Your Portfolio?

In case, none of the above situations provides the answer to suspension of the rating,
then the investor should contact the company directly to get clarification. Any further
interpretation should be after getting a response from the company.

Read: How to Contact Companies for Clarifications?

Regards,

Dr. Vijay Malik

Readers’ Queries about Credit Rating Reports

Should an investor rely completely on Credit Rating Reports?

Hi Vijay, In regard to mischievous adventures/misjudgments of credit rating agencies
comes fresh example and a case to study.

You have already analyzed Amtek India Limited very well and gave your opinion on high
debt which can bring the company some trouble in future. The inevitable happened
sooner than later and Amtek is running for cover and so kudos to your analysis and
judgment.

Read: Analysis: Amtek India Limited

Read: Analysis: Ahmednagar Forgings Limited

However, I want to bring to your notice, how credit agencies ignored such a prominent
fact and both CRISIL and CARE gave AA rating and then CARE downgraded them
directly from AA to “no rating” once this issue heated up. These are exactly the cases I
am worried about if one goes by credit ratings and their wisdom to analyse business
health.

Please do provide your views on it.

Regards

Author’s Response:

Hi,

16/23
Thanks for writing to me!

All the companies of Amtek group have high debt and the problems were visible when I
analyzed Amtek India Limited and Ahmednagar Forgings Limited. I believe that they can
be representative cases where investors can learn about the impact high debt can have
on any company.

Regarding your concern that an investor may get hurt “if one goes by credit ratings and
their wisdom to analyse business health”, I would say that if an investor uses credit
ratings as a replacement for her own hard work then there is a very high probability that
she would encounter surprises like Amtek.

However, this is true for any case when the investor makes investment decisions based
on other’s recommendations and not by her own research. This is equally applicable in
case of equity research reports, following high net worth investors, media market
specialists or any other source of stock recommendations.

Thus, every investor should understand that there is no alternative to own research.
www.drvijaymalik.com is one such attempt to help common investors do their own
research.

Having said that, does it mean that investors should stop reading credit rating reports?
The answer is no. Credit rating reports have a lot of relevant information for investors,
which has been described in the article.

The article above states that:

“G) Rather than a Rating, it’s the Movement of Credit Rating, which is More
Important”

Ignoring the vital information contained in the credit rating reports and focus only on the
absolute rating is not desired. Therefore, I believe that an investor should not discredit the
entire credit rating document because of cases like Amtek.

Credit rating reports provide vital information which is helpful in stock analysis and an
investor should not ignore it.

Further Advised Reading: Relevance of Credit Rating Agencies and the

Responsibility of Regulators

Regards,

Vijay

Why the data of debt contained in the credit rating report is different from
the data in the annual report?

Sir,

17/23
Can u please explain why there is so much difference in loan /borrowing figures of
Electrosteel Castings Ltd. from different sources? The data of total debt in the annual
report and the credit rating report is different.

Regards,

Author’s Response:

Hi,

Thanks for writing to us!

We advise readers to keep the following guidelines in mind when they compare data of
debt of any company from different sources:

1. The annual report contains the data of debt outstanding at the end of March 31 of
any year. Outstanding debt means total debt tranches taken from the bank less the
repayments already done. It does not include the amount/portion of the debt which
is sanctioned by the bank but has not been availed/used by the company.
2. Credit rating shows the data of total debt sanctioned by the bank irrespective of
whether the company has availed/used it until now or not. Please note that the
amount of repayment already done by the company is reduced by credit rating from
the data of debt shown in its report.
3. Credit rating report will show only the amount of debt, which is rated by it. There
might be more debt, which the company has taken but has chosen to get it rated
from a different rating agency. This “other debt” will not be present in the table on
the top of the credit rating report.

The following illustration will help you in understanding it better:

Debt sanction by the bank (A) = ₹100

Used by the company until date (B) = ₹60
Not yet used but can avail in future (C = A – B) = ₹40
Repayments done by the company from the availed debt until now (D) = ₹25
Debt outstanding (E = B -D) = ₹35
Total exposure still carried by the bank (F = C + E) OR also equal to (F = A – D) =
₹75
The annual report will show E = ₹35
Credit rating report will show F = ₹75

It is important to highlight it again that the table in the credit rating report will carry debt,
which is rated by this particular credit rating agency and not the debt that is rated by other
rating agencies.

This will help you in understanding the difference between the debt data of annual report
and credit rating reports.

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If there is a difference in the data of the debt in different sections of the annual report,
then it is advised to seek clarifications from the company asking, which of the different
figures is true debt or there is any typographical error in the annual report.

All the best for your investing journey!

Regards,

Dr. Vijay Malik,

How to obtain Credit Rating Reports (latest and historical reports)?

Could you please tell us how to get credit rating reports as I have noted that credit rating
reports are not freely available to retail investors?

Author’s Response:

Hi,

Thanks for writing to us!

The best way to get credit rating reports is to google “Company name Credit Rating”. First
few results will tell the investor whether the company is rated and if yes, then which credit
rating agency has rated it. After that, the investor needs to go to the credit rating agency
website, enter the company name in the search field and then download the summary
reports available at the credit rating website.

Then, investors may get credit rating reports from the websites of the credit rating agency.
The summary report is usually freely available to the public. Investors may need to
purchase a detailed report if they wish to read the detailed report. However, we believe
that investors should first read the summary report as it also contains a lot of valuable
information and then decide whether they want to buy the detailed report.

We have found that for our analysis, the summary reports have sufficed our purpose.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Related Query

Dear Vijay,

Where can we find the credit rating of the last 5 years? I am only able to find credit rating
of the current year. If I can get past credit rating records of a company then it would be
very helpful for my analysis.

19/23
Thanks and regards,

Author’s Response:

Hi,

Thanks for writing to us.

You may get the past credit rating summary reports on the website of credit rating
agencies. E.g. ICRA usually has all the past ratings available on its website. CARE
usually has for 1-2 years.

In these cases searching online on Google to check whether older reports are uploaded
on any other site like stock exchanges, money control etc. might help. Else, one might
have to buy the reports from the agencies. Alternatively, investors may try contacting the
company investor relations dept. to check if they can provide historical reports to the
investor.

Advised reading: How should investors contact Companies/Management for

clarifications or additional information?

We do not think that there is any other way to get historical reports. We are not sure
whether paid databases like Capitaline, CMIE etc. keep historical reports with them to
make available to their subscribers.

Otherwise, you may need to contact the credit rating agencies to send it to you by email,
which may entail charges.

Hope it answers your queries.

All the best for your investing journey!

Regards,

Dr Vijay Malik

How to interpret the suspension of credit rating for any company?

I was researching about the company Control Print Limited. I found that its credit rating
by CRISIL was A3+ but it was suspended on November 2013. According to CRISIL
FAQs, a rating is suspended when the disclosure level by the company is low. Is this a
bad thing if a company does not have a credit rating?

Also, when I look for credit rating in the screener.in, many good, debt-free companies like
Symphony Limited are not rated by any credit rating agency. Are such companies not
looking for a credit rating because they do not need to raise debt any time soon in future?

Author’s Response:

Thanks for writing to me!

20/23
A company might stop getting rated by credit rating agencies when it has repaid all its
debt, as the annual rating has costs attached to it.

Credit rating might be suspended by one agency when the borrower decides to shift to
another agency, then there might not be any problem with disclosure levels of the
company. Otherwise, there can be a real issue and a borrower going through a bad patch
may stop rating fearing downgrades.

All these are situations, which an investor has to judge.

Regards,

Companies paying to get their rating: Conflict of Interest

Superb article. Something which is rarely covered or discussed. Value investors generally
give less weight to credit agency reports and analysis, focusing more on annual reports
and financial statements. However, this article clearly shows why credit rating reports
cannot be ignored, rather can be used to one’s advantage. I have a couple of quick
questions:

1. Do you think companies paying to get themselves evaluated by the credit agency,
will generally get its positives highlighted more than its negatives due to incentives
bias (Whose bread I eat, His song I sing)? How do we put that in perspective? A
similar thing happened in 2008-09 crises in the US and since then credit agencies
have lost a bit of their trust in the fair analysis.
2. Do you think, this information is in the market (public) hence will immediately get
reflected in price?

Author’s Response:

Hi, Thanks for writing to me!

1) I do not know whether there has been any case where any company would have
managed to get a favourable rating, however, I do not think that rating industry survives
on earning money by giving positive ratings to borrowers. The credibility of rating
agencies depends on their independence and more or less their outputs reflect it.
However, this is not to vouch that every rating is right. An investor would have to take her
call in this matter.

Anyway, I prefer to focus on the trend of rating movement rather than any particular
rating.

2) I am not sure about what all factors the market prices at any point in time, reflect.
Market price movements defy all logic and I try not to have any opinion in this regard.

Regards,

Vijay

21/23
Is a credit rating mandatory for all the companies having debt?

Hi Dr Vijay,

Is there a minimum amount or duration of the loan that requires a company to go for
Credit Rating? I am analysing a small company, which has debt on its books. However, I
am unable to find the credit rating report for this company.

Author’s Response:

Hi,

Thanks for writing to us!

The credit rating requirement seems to have a minimum loan amount threshold. E.g. for
commercial papers, if the amount is more than ₹6 lac, then the credit rating is needed as
per RBI guidelines. If we are not wrong, then for bank loans, the minimum threshold may
be about ₹10 cr. Loans below the minimum threshold may not need to be credit rated.
You may need to search for it a bit. Alternatively, you may directly write to the company
about its credit rating.

Regards,

Vijay

Using Credit Rating Reports for Competitor Analysis

Thank you very much, Dr. Malik, for this excellent and very descriptive post which
combine a lot of things to learn for a newbie like me. I sincerely appreciate your efforts.

I was wondering if credit rating reports can also somehow help to learn about the
competitors of the company (both organised and unorganized). If yes, how? If not, then
what should be the ideal place to look for the peers and competitors (excluding
sector/industry list provided by BSE and also various sites like screener which may or
may not pick the right peer/competitor)?

Thanks in advance.

Author’s Response:

Hi,

Thanks for your feedback & appreciation! I am happy that you found the article useful!

The summary credit reports, which are available free for public download, do not contain
entire details about the competitors. However, many reports sometimes highlight/give
passing reference to the competitors. But it is not a standard part of all the reports. You
may get it in some of the reports.

22/23
However, you can get the details of competitors from other public sources like trade
databases to check competing exporters etc. A google search would help. Then you may
read the credit rating reports of the competitors, if they are credit-rated, to improve your
understanding of the sector.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

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Disclaimer

I am registered with SEBI as a research analyst under SEBI (Research Analyst)

Regulations, 2014.
At the date of writing this article, I do not own stocks of the companies mentioned
above, except Oriental Carbon & Chemicals Ltd in my portfolio.

23/23