Credit Ratings play an important role in deciding whether you must invest in a company. A good credit rating suggests that the company is financially strong and stable. While a poor credit rating means that the company is not financially strong and thus can be a risky investment.
So, how do companies get these ratings? How to decide which credit rating is good and which is bad? Where can one find a particular company’s credit rating? And what does credit rating mean?
Let’s learn all about it in this article by assessing Dabur India Limited!
Understanding Credit Ratings:
Let’s start with an example.
Your best friend calls you and asks if you can lend him Rs. 5,000. The first question that would cross your mind is…will he pay me back? Or will he be able to pay me back?
This is the exact case when start-ups or established companies ask banks or investors for funds. Except that they would be asking for lakhs and crores and not just Rs. 5,000.
Say that the bank lends the company some money and some portion is invested by individuals. After a couple of months, the company goes bankrupt. They fail to repay the borrowed funds. The loss is borne by the bank and the investors.
Thousands of people are affected because of this event. What if someone would have thoroughly analyzed various aspects of this company and their ability to manage debt?
This is where the Credit Rating Agencies (CRA) come in. They investigate and review the company by examining their financial statements. They rate a company based on various parameters. We will learn all about it in this article. Their aim is to check the financial stability of a company and their ability to repay their debt… In financial terms, they conduct due diligence on the company.
What does a Credit Rating tell an investor?
Investors in a company are exposed to credit risk. It means that the borrower of your money the company) might fail to repay the lender. A credit rating determines the borrower’s ability to repay loans. They have the ability to impact investor’s sentiments and the financial markets.
A poor credit rating means that the investment is risky. The company might have a poor history of repaying loans. While a good credit rating suggests that the company has the ability to repay the borrowed money, including the interest payments.
There are varieties of factors that affect a company’s credit rating. One of the main factors affecting a credit rating of a company is their past repayment history. Any missed payments or defaults on loans negatively impact the rating.
How do Credit Ratings work in India?
If a company issues debt, it is mandatory for them to obtain a credit rating. An individual can access these ratings for free. This has been mandated by the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI).
The company contacts and requests the CRA’s to prepare a credit report for them. Once the request is made, these agencies start working on their due diligence. Various factors like credit history, credit type, and duration, etc. are reviewed.
Based on their research, they prepare a credit report and publish them on their website. The report is later shared on the company’s website as well. Here is an example of Dabur India Limited’s Credit Report on their website –
Credit Rating Agencies in India:
Three major credit rating agencies around the globe are –
In India, there are seven Credit Rating Agencies. These agencies are regulated by SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992.
Brief about Indian Credit Agencies:
|Sr. No||Credit Rating Agency||Established in||Credit ratings Offered||Rating Scale|
|1||Infomerics Valuation and Rating Private Limited||1986||Rates insurance companies, banks, corporate issuers, project finance, financial institutions, finance and leasing companies, managed funds, and urban local bodies.|
|2||Credit Rating Information Service of India Limited (CRISIL)||1987||Rates companies, banks and organizations, helping investors make a better decision before investing in companies’ bonds.|
|3||Investment Information and Credit Rating Agency of india (ICRA)||1991||Rates bank loan, corporate debt, corporate governance, insurance sector rating, mutual fund rating, public finance, project finance, SME Rating.|
|4||Credit analysis and Research Limited (CARE)||1993||Rates debt, bank loan, corporate governance, recovery, financial sector and more.|
|5||India Rating and Research Pvt. Ltd||1995||Rates corporate issuers, managed funds, financial institutions, project finance companies, urban local bodies and structured finance companies.|
|6||Acuite Ratings & Research Limited||2005||Rates securities, debt instruments and bank facilities of entities spread across the country and section of industries.|
|7||Brickwork Rating (BWR)||2007||Rates bank loans, municipal corporation, capital market instruments and SMEs, real estate investments, hospitals, NGOs, MFI, etc.|
Assessment of Dabur India Limited:
CRISIL gave AAA/Stable/CRISIL A1+ rating to debt instruments and bank facilities of Dabur India Limited. Instruments with such ratings carry the lowest credit risk.
When you further read the credit report, you will find the key rating drivers and a detailed description. Read about the strengths & the weaknesses of the company and the agency’s outlook.
Below are the factors CRISIL considered while assessing Dabur India Limited’s performance:
You can calculate these ratios by analyzing the company’s financial statements. They are one of the most prominent items to understand a company. It primarily consists of three statements –
One can find these statements in the company’s annual report on their website. Financial ratios help identify trends. It becomes easier to compare companies with their competitors in their industry.
What is the difference between credit rating and credit score?
Credit rating is for a business or a company. A credit score is given to an individual.
Credit ratings are usually denoted in alphabetical symbols. Whereas credit score is a number. This number can be between 300 and 900.
Bankers check for credit score before lending to individuals. It helps them check the potential risk they undertake by lending the amount. This is not limited to banks. Insurance companies and landlords too use this score to test borrower’s creditworthiness.
An important point to note is that credit ratings act like an assurance. They do not guarantee risk-free investment. Also, credit ratings are not static. They will change if an agency thinks that the probability of default for an issuer has changed.
Credit rating makes comparison of two companies of the same industry easier. However, credit ratings do not safeguard you from risks. While the credit rating agencies continue to play a significant role, it is important for investors to perform their own analyses before investing.
Read the company’s annual report to understand their long-term goals. Analyze their financial statements to know their financial health. Perform ratio analyses to have a better judgement about a company.
If you don’t have the time to do all this on your own then we have created a simple tool to rate every listed company in the Indian stock market.
With SAMCO, start making informed investment decisions!