The Hindu Business Line : Foreign brokerages downgrade Indian firms

Mumbai, July 9 Rising domestic inflation, political uncertainties, and the recent movement in oil prices have led to many foreign brokerages downgrading Indian firms. Lehman Brothers, Credit Suisse, Morgan Stanley, HSBC are some of the brokerages that have done this. The downgraded companies are mainly in the capital goods and financial services sectors.

monetary tightening

HSBC Global Research, which brought down the Sensex’s 2008-end target to 14000 from 17500 said in its report that it expects both the repo rate and the CRR to rise by 100 bps each. It added that such monetary tightening would impact growth and hurt the “discretionary and investment spending.” The Sensex has fallen more than 35 per cent from its peak of over 21000 in January of this year.

Morgan Stanley has downgraded Axis Bank, HDFC, ICICI, and Idea Cellular, while Credit Suisse has cut its ratings on IDFC, i-flex Solutions, Thermax, BEML, Crompton Greaves and Cummins. Deutsche Bank, CLSA and Credit Suisse have cut their ratings on SBI.

Deutsche Bank said in its report that the confluence of too many negatives has made them cautious despite a recent pullback. “We believe that the drivers of the bank’s re-rating in 2007 face significant political, sector and bank-specific head winds that the recent pullback in the stock does not reflect adequately,” stated the report.

Lehman Brothers maintained its “sell” recommendation on Indian equities saying current valuations are yet to factor in the challenging economic environment.

High oil prices and inflation rates have led to major concerns regarding the country’s economic fundamentals. “India is one of the largest importers of oil, and rising oil prices will impact us in a big way,” said Mr Sachchidanand Shukla, Chief Economist at Enam Securities.

Crude oil hit a peak of $146 in early July and domestic inflation shot up to a 13-year-high of 11.63 per cent.

Macro concerns

“Our economic fundamentals are right now being questioned due to these various macro-economics concerns, which is why many foreign brokerages expect a dramatic slow down in the Indian growth story,” added Mr Shukla.

Capital goods companies are being downgraded because a slowing economy puts pressure on these companies’ free cash flow and profits and drives up their cost of borrowing, and all these factors make new capex much more expensive according to Mr John Moore, Managing Director and Chief Executive Officer at KZen Equities.

As for the banking sector, Mr Manoj Mohta, Head of Research at CRISIL said from a macro economic perspective there are concerns on the GDP growth rate, which would lead to slowdown in the credit growth for the banking industry. “Crisil Research estimates the mark-to-market losses for the banking system at Rs 9,000 crore. Netting off the impact of the gains in investment income, the overall impact is expected to be a loss of Rs 4,800 crore in 2008-09,” added Mr Mohta.

The business confidence is down and the optimism in the market on the whole is low due to various macro-economic factors said Mr Kaushal Sampat, Chief Operating Officer, Dun & Bradstreet-India. The Dun & Bradstreet Business Optimism was down 11 per cent in the third quarter of 2008 which is the lowest since 2004.