Icra scales up projection for GDP contraction to 11% from 9.5% earlier

 Rating agency Icra has revised its forecast for the contraction in the gross domestic product (GDP) to 11 per cent from its earlier assessment of 9.5 per cent for 2020-21, with fresh Covid-19 infections remaining elevated at the end of the second quarter of the year. With this, most agencies now projected double digit de-growth in GDP for the current financial year (see chart).

However, Icra retained its earlier forecast of fall in GDP at 12.4 per cent in the second quarter. The agency revised its projections for GDP decline to 5.4 per cent from 2.3 per cent for the third quarter and to 2.5 per cent form earlier projection of 1.3 per cent growth in the fourth quarter. The economy had shrunk an unprecedented 23.9 per cent in the first quarter.

“We expect construction as well as trade, transport, hotels, communications and services related to broadcasting to recover with the longest lag and continue to underperform the rest of the economy. We believe the gross value added (GVA) at basic prices for these sectors would record a contraction even in Q4 despite the favourable base effect, resulting in the overall GVA and GDP continuing to record a decline in growth in that quarter,” ICRA principal economist Aditi Nayar said.

Icra cautioned that if the pace of GDP decline in the first quarter got revised below the initial estimate after data for the MSME and less formal sectors became available, the overall economic contraction for FY21 could be even worse than the ratings agency’s expectations'.

ALSO READ: Automobile dealers expect flat or moderate growth in festive season: ICRA

Nevertheless, higher government spending, a faster global recovery, and an early decline in fresh Covid-19 cases could impart an upside to these forecasts.

However, the revenue shock being experienced by the Central and the state governments would limit the extent of fiscal support that may be forthcoming and result in protracted fears about deferral of both the capex and the release of timely payments. Moreover, fresh restrictions being imposed on major trading partners following a new wave of Covid-19 cases, could cap the extent of further improvement in exports in the near term.

Nayar said, “With the pandemic continuing in India for over six months, we sense that economic agents are now adapting to the crisis, resulting in a graduated recovery to a new post-Covid normal. Nevertheless, with rampant Covid-19 infections, we expect behaviours to remain altered for longer than what we had earlier presumed. This would continue to depress activity in some sectors, especially where social distancing is difficult such as travel, tourism and recreation. Additionally, the continued economic uncertainty and health concerns would result in a prolonged impact on consumption and investment decisions.”

Brokerage industry's revenues expected to reach Rs 23,000 cr in FY21: Icra

 With increasing retail investor activity and a surge in trading volumes, the domestic brokerage industry's aggregate revenues are expected to reach Rs 23,000 crore in the current financial year, marking a year-on-year growth of 10 to 12 per cent.

According to investment information firm ICRA, the domestic capital markets have witnessed an unexpected surge lately in stark contrast to the overall economic outlook.

And while broking yields continue to be under pressure, given the competitive dynamics as well as product mix (increase in non-delivery volumes as well as the rising share of index options), the healthy growth in turnover more than offset the impact on broking income.

As per ICRA, the aggregate brokerage industry income stood at Rs 21,000 crore in FY20, registering a growth of 8 per cent over Rs 19,500 crore in FY19.

"The outlook for the brokerage industry is cautiously stable. While the industry is expected to clock a healthy growth at an aggregate basis, brokerage companies are also expected to face greater operational and funding challenges which could have bearing on their performance, particularly for small to mid-sized brokerage companies."

The industry profitability level is expected to be supported by growing retail share coupled with an increase in interest income through margin funding, provided the credit cost remains under check and distribution of financial products, despite the pricing pressure and contracting yields.

Brokerage companies, however, are expected to grapple with increasing operational challenges in the current environment which will require a greater focus and spend on technology to ensure uninterrupted operations as well to meet regulatory compliance requirements (given the enhanced monitoring and reporting requirement).

Entities with established information technology infrastructure as well as commensurate processes and controls are expected to fare better. The recent guidelines regarding the raising of funds as well as the use of client securities by broker entities are expected to increase the funding requirement for brokers to maintain adequate margins at exchanges.

This coupled with the standardisation of cash segment margin is expected to limit the brokers' ability to offer additional value proposition like flexible payment terms, credit to its clients. Brokerage companies having their own assets (hard assets or securities) and strong balance-sheets will be at an advantage while trying to raise debt funding.

Over the long term, a stronger regulatory framework is expected to strengthen industry structure and improve financial discipline which is critical, given the fiduciary duty of broking entities.

Given the recent violations in the use of client securities coming to light in the recent past, stricter terms for brokerage houses will also help strengthen investor confidence and thus augur well for the industry.

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ICRA slides 5% after it terminates MD and Group CEO Naresh Takkar

Shares of ICRA, the Indian arm of global rating agency Moody's, declined around 5 per cent on the BSE in the intra-day trade on Friday after the company terminated its Managing Director (MD) and Group Chief Executive Officer (CEO) Naresh Takkar’s employment. The rating agency has attributed the unprecedented move to protect interests of the company and its shareholders.
According to the company, “ICRA remains committed to ensuring independence and integrity of its ratings process and sound corporate governance.”

Takkar had been on indefinite leave since July pending an inquiry by the Securities and Exchange Board of India (Sebi) after a whistle-blower alleged interference by top executives of the rating agency in issuing good ratings to Infrastructure Leasing & Financial Services (IL&FS) and its subsidiaries.
Without disclosing reasons, ICRA informed the stock exchanges on Thursday, “The board, after due consideration and taking into account the best interests of the company and its various stakeholders, has decided to terminate the employment of Takkar with immediate effect.” READ MORE
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The ICRA board said it would commence a search for Takkar’s replacement, adding that Vipul Agarwal, who was named interim chief operating officer on July 1, 2019, remains responsible for the day-to-day operations of the firm until a CEO is appointed.
Global rating agency Moody’s owns 51.87 per cent in ICRA.
At 1:26 pm, the stock was trading at Rs 2,691 apiece on the BSE, down around 4 per cent. During the session, the stock hit an intra-day low and high of Rs 2,661.10 and Rs 2,739.85, repectively. A total of 23.03 lakh shares changed hands on the BSE and NSE till the time of writing this report.
In comparison, the benchmark S&P BSE Sensex was trading at 36,957, down 112 points or 0.30 per cent.

Under Sebi glare, ICRA sends MD and CEO Naresh Takkar on sudden leave

In an unprecedented move, the board of rating agency ICRA on Monday has asked its Managing Director and Chief Executive Officer Naresh Takkar to go on indefinite leave, pending an enquiry into concerns raised by the market regulator the Securities and Exchange Board of India (Sebi).
Without disclosing specific reasons, the rating agency informed the stock exchanges that its board in its meeting on Monday decided to place Takkar on leave, effective immediately, until further notice pending the completion of the examination of the concerns raised in the anonymous representation that was forwarded to the company by Sebi.

The rating agency has appointed Chief Financial Officer Vipul Agarwal as the interim chief operating officer who will be reporting to the board. Global rating agency Moody’s owns 51.87 per cent in ICRA.
When contacted, Takkar said he had been asked to go on leave but refused to give further details.
Sources said this move was triggered by a whistleblower complaint sent to Sebi against senior management interference in ensuring good ratings specifically in Infrastructure Leasing & Financial Services (IL&FS) and its subsidiaries.
Sebi is already probing the case and has launched adjudication proceedings against three rating agencies ICRA, Care Ratings and India Ratings in the ratings assigned to IL&FS and its group firms. Sources in the know said a similar action was being contemplated at other rating agencies.
The market watchdog has been of the view that rating agencies should be able to pick up early signs of a crisis and issue a rating watch, followed by rating action.
Sebi is probing whether the agencies acted in an appropriate manner in issuing ratings to IL&FS group firms. In May, Icra had said that the board had appointed external experts to look into the anonymous representation forwarded by Sebi. The company said it had made provisions in light of these two issues.’
“Based on the work done till date, the company has made provision on a prudent basis with regards to the adjudication proceedings, while, apropos the representation, no findings have yet been identified. The company will consider the implications, if any, in due course, upon completion of these matters,” Icra had said.
The rating agencies have been under the scanner for not downgrading the commercial papers of IL&FS Financial Services (IFIN) despite weak financials. This rating had apparently given confidence to investors to buy debt papers of IL&FS and its subsidiaries, said a market expert.
In fact, the rating agencies had given IL&FS debentures “AAA” rating, the highest level of creditworthiness, until its subsidiary IL&FS Transportation Networks defaulted in June last year.

ICRA looking into IL&FS rating issue, hires external experts for assistance

ICRA is working on addressing issues pertaining to credit rating of crisis-hit IL&FS and its subsidiaries and has sought help from external experts in the matter.
"The company is in the process of addressing certain matters related to credit rating assigned to one of its customer and its subsidiaries, and an anonymous representation," ICRA said in a regulatory filing on quarterly earnings announced Thursday.

In an investor communication in December, ICRA had informed about receiving a notice from market regulator Sebi for conduct of adjudication proceedings in relation credit ratings assigned to Infrastructure Leasing & Financial Services (IL&FS) and one of its subsidiaries -- IL&FS Financial Services.

"These proceedings are under...Sebi Act, 1992, which deals with potential imposition of monetary penalty," it said in the investor communication presented on December 19, 2018.
The crisis-ridden infrastructure conglomerate, once a pioneer of public-private partnership, came under the scanner of multiple regulators besides Sebi post defaults in debt obligations as well as matters related to financial disclosures and corporate governance.
Role of some rating agencies, including ICRA, is also being looked into for possible lapses on their part as mutual funds have had a huge exposure to various debt securities of the group.
ALSO READ: RBI withdraws circular asking banks to declare their IL&FS exposure
IL&FS, which is credited for building some major infrastructure projects in the country is sitting on a over a debt pile of Rs 91,000 crore, out of which Rs 57,000 crore are bank loans most of which are from state-run banks,
"Our opinion is not modified in respect of these matters," it said.
The board of directors has appointed external experts to assist with/look into the aforesaid and related matters, which are currently on going.
"Based on the work done till date, the company has made provision on a prudent basis with regards to the adjudication proceedings, while, apropos the representation, no findings have yet been identified," it said.
The company will consider the implications, if any, in due course, upon completion of these matters, it added.
A company spokesperson declined to comment any further on the matter including the time-frame to complete the findings.
The ratings firm had reported decline of over 5 per cent in its net profit at Rs 26 crore in fourth quarter ended March 2019. Income during the period also fell to Rs 95.19 crore from Rs 99.65 crore in year ago same period.
Profit during the full year 2018-19 also fell by 3.9 per cent to Rs 96 crore, however the income was up by 0.7 per cent at Rs 274.70 crore.

Ayushman Bharat to help hospital sector bounce back in 2019, says Icra

After witnessing a growth erosion for the past two years due to several regulatory restrictions, the hospital sector seems to be on the path to recovery.
The sector’s revenue is likely to grow in the range of 8-10 per cent in short-to-medium term, supported by a higher number of patients and better pricing, said an Icra report. The report gave a stable outlook to the sector.

Significant bed additions in the last four years, and their ramp-up is expected to show marked results, it said.
Further, the sector is expected to benefit from an increase in the disease burden, higher incidents of lifestyle diseases, and an ageing demographic profile.
Implementation of the goods and services tax (GST), the cap on prices of stents, knee implants by the National Pharmaceutical Pricing Authority, and stiff regulatory action by certain states, including putting restrictions on procedure rates, levying penalties and placing operational limitations on erring hospitals had hurt the profitability of the sector.
chart Ayushman Bharat, the government's healthcare plan, is also likely to fuel the mandatory and discretionary healthcare spending in the country as the plan boosts the spending power of the patients, added the report.
In the second quarter of FY19, the companies in Icra's sample set had reported a 7 per cent drop in earnings before interest, tax, depreciation and amortisation (Ebitda), from Rs 5.56 billion in Q2 FY18 to Rs 5.16 billion. It also saw a drop in operating margin from 15 per cent to 13.3 per cent during this period.
The aggregate revenue grew by a subdued 5 per cent from Rs 37.07 billion in Q2 FY18 to Rs 38.89 billion. Shubham Jain, group head and vice-president, Icra had said the aggregate number of operational beds has gone up 4 per cent, from 20,665 beds in Q2 FY18 to 21,551 beds in Q2 FY19.

Icra downgrades ratings of IL&FS loans, debentures to 'junk' status

Rating agency ICRA has effected a multi-notch rating downgrade for IL&FS, which is facing liquidity pressure and overleverage. Its loans and debentures now carry “BB” (junk or non-investment status) as against the previous rating of "AA+". Also, the commercial paper carries "A4" rating against the previous rating of "A1+".
Ratings remain under watch with developing implications, ICRA said in a statement. Last month, ICRA had cut IL&FS' rating from "AAA" to "AA+" for loans and debentures.

Infrastructure Leasing & Financial Services (IL&FS) is a core investment company (CIC) and serves as the holding company of the IL&FS Group, with most business operations domiciled in separate companies.
ICRA said the downgrade of ratings takes into account the increase in liquidity pressure at the group level. The company is in the process to raise Rs 80 billion of funds from the promoter group (through a mix of rights issue and long term line of credit). The timely receipt of the fund is important to improve the group's overall liquidity profile.
Further clarity is awaited on the timing of these inflows and given the sizeable repayment obligations of the group's debt, this remains a key rating sensitivity in the near term.
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The ratings also factor in company's elevated debt levels owing to the funding commitments towards Group ventures coupled with slow progress on asset monetisation and deterioration in the credit profile of key investee companies.
ALSO READ: IL&FS board decides to seek a loan of Rs 30 billion from LIC and SBI
The IL&FS Group is in midst of deleveraging its balance sheet and streamlining the portfolio. The ratings, however, continue to factor in IL&FS' long history of business operations in the infrastructure space, domain expertise of its senior management and its strong institutional promoters.
ALSO READ: IL&FS defaults on Rs 10 billion short-term loan from SIDBI: Sources
Over the years, IL&FS' focus has steadily shifted from project sponsorship to that of project advisory and project facilitator for development and implementation of projects.

Thirteen states report 25% decline in fiscal deficits in FY18: ICRA report

Thirteen states have reported an average 25 per cent decline in their fiscal deficit primarily due to a contraction in capital outlay, even though their revenue has gone up by 7.5 per cent in the fiscal year to March 2018, says a report.
However, in FY17, their revenue had gone up by 11.5 per cent, says a report by domestic credit rating agency Icra, based on the provisional fiscal data given by the CAG of 13 states.

Fiscal deficit of these 13 states sharply fell by 25.1 per cent to Rs 3.2 trillion in FY18 from Rs 4.3 trillion in FY17, partly on account of the contraction in capital spending.
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"While the CAG data shows that these 13 states have seen a steep 25 per cent decline in their fiscal deficit in FY18, their aggregate revenue receipts rose 7.5 per cent, which is sharply lower from 11.5 per cent a year ago," Icra said in a weekend report.
According to the agency, this slowdown in revenue growth was led by a contraction in the non-tax revenue, comprising grants from the Centre and states' own non-tax revenues, and a mild slowdown in the pace of growth of tax revenue, comprising Central tax devolution and states' own-tax revenues.
But the agency estimates that the pace of growth of the aggregate tax revenue of 13 states improved to 10.1 per cent in FY18 from 7.7 per cent in FY17, as the CAG data is only provisional.
The pre-actuals for FY18 indicate that growth of aggregate revenue expenditure of these 13 states eased to 8.8 per cent from 13.1 per cent in FY2017, while the capital outlay contracted by 9.4 per cent in FY18 in contrast to the healthy growth of 17.1 per cent in FY17.
"The contraction in capital outlay can be due to a combination of factors, including the lack of fiscal space led by the slowing growth of revenue receipts, re-prioritisation of spending after the farm loan waiver announcement by some leading states, base effect related to the Uday scheme (of the power sector) and the delay in presentation of budgets by a few states in FY18 due to the assembly elections," it says.
The provisional data also indicates a massive 46.7 per cent widening of revenue deficit of these states to Rs 723.6 billion from Rs 493.4 billion in FY17, even as fiscal deficit of these states narrowed by 25.1 per cent to Rs 3.2 trillion from Rs 4.3 trillion in FY17, due to contraction in capital spending.
Going forward, the rating agency feels that the national introduction of the e-way bill should boost GST collections.
Additionally, the pace of growth of tax revenue collected on items, which at present are not under the GST, would impact the revenue of the states.
The report also sees higher tax collection in this fiscal as it believes that they may net more VAT from petroleum products given the spike in crude prices.
VAT is typically levied on an ad valorem basis by the states, and higher crude prices would ensure that they net higher revenues from higher retail prices, provided the Centre does not reduce the basic excise duty.
"Sales tax collections of the states on oil products may continue to grow at a healthy pace in FY19. In our view, the annual growth of the aggregate VAT collection on oil products of all states could exceed 20 per cent in Q1 of FY19," the report says.
On expenditure side, some key factors that may keep the revenue spending of the states elevated, include the staggered implementation of the pay revision, funding of a portion of the crop loan waivers and implementation of new schemes ahead of the national and state polls.