1. What is Credit Rating? Credit rating an unbiased, objective

and independent opinion as to an issuer’s capacity to meet its financial obligations. CRISIL’s current opinion as to the relative safety of timely payment of interest and principal on a particular debt instrument.

CRISIL rating applies to a particular debt obligation of the company and is not a rating for the company as a whole. The rating also does not constitute a recommendation to buy / sell or hold a particular security.

2. Why seek a Credit Rating? Ans. The process of rating is an

independent, external review of the management, its strategies and corporate performance. CRISIL Rating provides benefits to both issuers and investors.

Issuerso For the borrowing company, a CRISIL

rating assists in enhancing the marketability of the instrument. A CRISIL rating offers an issuer a wider range of funding alternatives as well as the opportunity to raise money at a relatively lower cost and from a larger body of lenders thus leading to a broader investor base.

o Highly creditworthy companies may not necessarily be well known in the market, a CRISIL rating can facilitate fund raising for such companies.

o For institutional investors who usually operate under strict investment guidelines, it is often necessary that the securities in which they invest, carry a credit rating assigned by a recognized rating agency.

o A CRISIL rating also benefits an organization to differentiate itself in the market and establish its financial standing any time required.

Investorso As rating serve as an objective guide to the risk

involved in a particular instrument, investors use ratings to supplement their own credit evaluation process. CRISIL ratings assist investors, particularly in instances where they do not have the resources or the access to management, to perform a thorough credit risk analysis of the borrower.

o Credit rating also facilitates comparison of relative value between competing securities. By providing a measure of relative creditworthiness, a credit rating can help investors decide if they wish to lend to or invest in securities issued by a particular

o Issuer and to determine the return on the investment they should demand, given the relative degree of credit risk involved.

3. Who do our clients?

CRISIL’s Rating Methodology

CRISIL commences a rating exercise at the request of a company. The rating methodology involves analysis of the industry risk, the issuer’s business and financial risks. CRISIL assigns ratings after its assessing factors that could affect the creditworthiness of the borrowing entity. Typically the industry risk assessment sets the stage for analysing more specific company risk factors and establishing the priority of these factors in the overall evaluation.

For example, if an industry is determined to be highly competitive, careful assessment of the issuer’s market position is stressed. If the company has large capital requirements, examination of cash flow adequacy assumes major importance.

The ratings are based on current information provided to CRISIL by the borrowing company, or facts obtained by CRISIL from sources it considers reliable. In evaluating and monitoring ratings, CRISIL employs both qualitative and quantitative criteria in accordance with the industry practice.

Ratings for Manufacturing Companies

BUSINESS RISK ANALYSIS

The rating analysis beings with an assessment of the company’s environment focusing on the strength of the industry prospects, pattern of business cycles, as well as the competitive factors affecting that industry. The vulnerability of the industry to Government controls and regulations is assessed.

The nature of competition is different for different industries and can be based on price, product quality, distribution capabilities, image, product differentiation, service etc. Industries characterised by steady growth in demand, ability to maintain margins without impairing future prospects flexibility in the timing of capital outlays, and moderate capital intensity are in a stronger position.

When a company participates in more than one business, each segment is analysed separately. A truly, diversified company will not have a single business segment that is dominant, and the company’s ability to manage diverse operations will be significant factor.

As a part of the industry analysis, key rating facto are identified into keys to success and areas of vulnerability.

The main industry and business factors assessed include

• Industry Risk : Nature and basis of competition, key success factors, demand supply position, structure of industry, cyclical/ seasonal factors, Government policies etc.

• Market position of the issuing entity within the industry: Market share, competitive advantages, selling and distribution arrangements, product and customer diversity etc.

• Operating efficiency of the borrowing entity: Locational advantages, labour relationships, cost structure, technological advantages and manufacturing efficiency as compared to competitors etc.

• Legal position: Terms of the issue document / prospectus, trustees and their responsibilities, systems for timely payment and for protection against fraud / forgery etc.

While CRISIL does not have minimum size criterion for any give rating level, size of the company is critical factor in the rating decision as smaller companies are more vulnerable to business cycle swings as compared to larger companies. In general, small companies are more concentrated in terms of product, number of customers and geography and consequently, lack the benefits of diversification that can be benefit larger firms.

If the company being rated is a subsidiary or an affiliate, that is controlled by / has strong links with a dominant parent company, then the rating would also include an analysis of the parent company’s credit quality could have an impact on the issuers own credit quality.

FINANCIAL RISK ANALYSIS After evaluating the issuer’s competitive

position and operating environment, the analysis proceeds to analyse the financial strength of the issuer. Financial risk is analysed largely through quantitative means, particularly by using financial ratios. While the past financial performance of the issuer is important, emphasis is place on the ability of the issuer to maintain / improve its future financial performance.

As ratings rely on audited date (the rating process does not entail auditing a company’s financial records), the analysis of the audited financial results begin with a review of accounting quality. The purpose is to determine whether ratios and statistics derived from financial statements can be used to accurately measure a company’s performance and its position, relative to both its peer group and the larger universe of companies.

The profitability of a company is an important determinant of its ability to withstand business adversity as well as generate capital internally. The main measures of profitability studied include operating and net margins and return on capital employed. The absolute levels of these ratios, trends in movement of the ratios as well as comparison of the ratios with other competitors, is analysed. As a rating exercise is a forward looking exercise, more than the past, greater emphasis is laid on the future earnings capability of the issuer.

CRISIL also lays emphasis on analysis of cash flows patterns, as it provides a better indicator of the issuer’s debt servicing capability compared to reported earnings. A cash flow analysis reveals the usage of cash for different purposes, and consequently the extent of cash available for debt service.

The future debt claims on the issuer’s as well as the issuer’s ability to raise capital is also assessed in order to arrive at the level of the issuer’s financial flexibility.

The area considered in financial analysis include:

Accounting Quality : Overstatement / understatement of profits, auditors qualifications, method of income recognition, inventory valuation and depreciation policies, off Balance Sheet liabilities etc.

Earnings protection: Sources of future earnings growth, profitability ratios, earnings in relation to fixed income charges etc.

Adequacy of cash flows : In relation to debt and working capital needs, stability of cash flows, capital spending flexibility, working capital management etc.

Financial flexibility : alternative financing plans in times of stress, ability to raise funds, asset deployment potential etc.

Interest and Tax sensitivity : exposure to interest rate changes, tax law changes and hedge against interest rates etc.

MANAGEMENT RISKA proper assessment of debt protection

levels requires an evaluation of the management philosophies and its strategies. The analyst compares the company’s business strategies and financial plans (over a period of time) to provide insights into a management’s abilities with respect to forecasting and implementing of plans.

Specific areas reviewed include:Track Record of the management :

planning and control systems, depth of managerial talent, succession plans.

Evaluation of capacity to overcome adverse situations.

Goals, philosophy and strategies.

How Does the Ratings Process Work?Ans.• Rating Agreement and Assignment of the

Analytical Team• Management Meeting• Rating Committee• Communication to the Issuer• Dissemination to the Public