Bloomberg News

South Asian Companies Vulnerable to Weakening Demand, S&P Says

February 01, 2012

Feb. 1 (Bloomberg) -- Companies in India, Pakistan and Sri Lanka are vulnerable to a further weakening in domestic demand in 2012 because governments have limited capacity to provide a fiscal boost, Standard & Poor’s said.

While large companies can withstand a slowdown in demand and rising input costs, the creditworthiness of their smaller peers will probably deteriorate, S&P said in a report today. The ratings company expects new capital expenditure investments to slow in South Asia except Sri Lanka, especially for projects in the electric utilities, metals and mining industries.

A deteriorating global economy has hurt Asian exporters, as higher commodity prices and inflation raised costs and trimmed companies’ profit margins. Shortages of fuel and distribution capacity have forced India’s Adani Power Ltd., JSW Energy Ltd. and Lanco Infratech Ltd. to postpone plans in December and January to add $13.9 billion worth of capacity, part of about $36 billion in delayed investments across the industry.

“Country risk continues to play an important role in the credit profile of companies in South Asia,” S&P said in the report. “The rise in risk in India is due to a perceived increase in corruption and uncertainty in policies. Political turmoil and an energy crisis have raised country risk in Pakistan.”

The increase in risks is making it harder for companies to manage their cash flows, form long-term strategies, and proceed with investment plans, S&P said. Allegations of corruption in Prime Minister Manmohan Singh’s cabinet triggered mass protests across India last year, while a failure to contain inflation and delays in several proposed laws have sapped investor confidence.

Access to Capital

India’s central bank expects growth in the year through March 2012 to slow to 7 percent, while Pakistan cut its forecast for expansion in the year through June to 3.6 percent.

Liquidity for the companies that S&P rates will remain “adequate to strong” because of their large cash balances and access to capital, credit analyst Mehul Sukkawala said in the report today.

“The outlook on most of the companies that we rate in South Asia is stable,” Sukkawala said. “These companies are generally large in their respective markets and have diversified operations, experienced managements, and strong financial resources. This should help them sustain their credit profiles.”

--Editors: Shamim Adam, Stephanie Phang

To contact the reporter on this story: Rina Chandran in Singapore at rchandran12@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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