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IPO RatingIPO Rating

Lecture Prepared ByLecture Prepared By

Dr. N SDr. N S BohraBohra

Assistant ProfessorAssistant Professor

Faculty of ManagementFaculty of Management

GEUGEU

IPO Grading ProcessIPO Grading Process

Importance of Credit RatingImportance of Credit Rating Factors Affecting Assigned RatingsFactors Affecting Assigned Ratings

The security issuerThe security issuers ability to service its debt.s ability to service its debt.

The stability of the future cash flows and earningThe stability of the future cash flows and earning

capacity of company.capacity of company.

The interest coverage ratio i.e. how many numberThe interest coverage ratio i.e. how many number

of times the issuer is able to meet its fixed interestof times the issuer is able to meet its fixed interest

obligations.obligations.

Ratio of current assets to current liabilities (i.e.Ratio of current assets to current liabilities (i.e.

current ratio (CR)) is calculated to assess thecurrent ratio (CR)) is calculated to assess the

liquidity position of the issuing firm.liquidity position of the issuing firm.

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Nature of Credit RatingNature of Credit Rating

Rating is based on informationRating is based on information

Rating by more than one agencyRating by more than one agency

Publication of ratingsPublication of ratings

Rating is for instrument and not for theRating is for instrument and not for the

issuer company.issuer company.

Right of appeal against assigned rating:Right of appeal against assigned rating:

Instruments of RatingInstruments of Rating

Bonds/debentures issued by corporate,Bonds/debentures issued by corporate,government etc.government etc.

Commercial papers issued by manufacturingCommercial papers issued by manufacturingcompanies,companies,

finance companies, banks and financialfinance companies, banks and financialinstitutions for raising shortinstitutions for raising short--term loans.term loans.

Fixed deposits raised for mediumFixed deposits raised for medium--term ranking asterm ranking asunsecured borrowingsunsecured borrowings

Rating Other than Debt InstrumentsRating Other than Debt Instruments

Country Rating (MorganCountry Rating (Morgan StanlayStanlay,, MoodysMoodys))

Rating of Real Estate Builders andRating of Real Estate Builders and

DevelopersDevelopers

Rating of StatesRating of States

Rating of BanksRating of Banks

Functions of a Credit Rating AgencyFunctions of a Credit Rating Agency

Provides unbiased opinion.Provides unbiased opinion.

Provides quality and dependableProvides quality and dependable

informationinformation

Provides information at low cost:Provides information at low cost:

Provide easy to understand information:Provide easy to understand information:

Provide basis for investment:Provide basis for investment:

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Advantages of Rating To CompanyAdvantages of Rating To Company Advantages of RatingAdvantages of Rating

For InvestorsFor Investors

Safety of investments.Safety of investments.

Recognition of risk and returns.Recognition of risk and returns.

Freedom of investment decisions.Freedom of investment decisions.

Wider choice of investments.Wider choice of investments.

Dependable credibility of issuer.Dependable credibility of issuer.

Benefits of Rating to the CompanyBenefits of Rating to the Company

Easy to raise resources.Easy to raise resources.

Reduced cost of borrowing.Reduced cost of borrowing.

Reduced cost of public issues.Reduced cost of public issues.

Rating builds up image.Rating builds up image.

Rating facilitates growth.Rating facilitates growth.

Disadvantages of Credit RatingDisadvantages of Credit Rating

NonNon--disclosure of significant information.disclosure of significant information.

Rating is no certificate of soundness.Rating is no certificate of soundness.

Rating may be biased.Rating may be biased.

Rating under unfavorable conditions.Rating under unfavorable conditions.

Difference in rating grades.Difference in rating grades.

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Rating MethodologyRating Methodology

The following are the main factors that areThe following are the main factors that are

analyzed into detail by the credit ratinganalyzed into detail by the credit rating

agencies.agencies. Business Risk AnalysisBusiness Risk Analysis

Financial AnalysisFinancial Analysis

Management EvaluationManagement Evaluation

Geographical AnalysisGeographical Analysis

Regulatory and Competitive EnvironmentRegulatory and Competitive Environment

Fundamental AnalysisFundamental Analysis

Rating MethodologyRating Methodology

1.Business Risk Analysis1.Business Risk Analysis

Industry riskIndustry risk

Market position of theMarket position of the

companycompany

Operating efficiencyOperating efficiency

Legal positionLegal position

Size of businessSize of business

2. Fundamental Analysis2. Fundamental Analysis

liquidity management,liquidity management,

profitability andprofitability and

financial position,financial position,

interest and tax ratesinterest and tax rates

sensitivity of thesensitivity of the

company.company.

Rating MethodologyRating Methodology

3. Financial Analysis3. Financial Analysis Accounting qualityAccounting quality

EarningsEarnings

potential/profitabilitypotential/profitability

Cash flows analysisCash flows analysis

Financial flexibilityFinancial flexibility

4.4. Management EvaluationManagement Evaluation

GoalsGoals

PlansPlans

StrategiesStrategies

Corporate GovernanceCorporate Governance

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Rating MethodologyRating Methodology

5. Geographical Analysis5. Geographical Analysis

Geographical SizeGeographical Size

LocationLocation

6. Regulatory and Competitive6. Regulatory and Competitive

EnvironmentEnvironment

Regulatory framework ofRegulatory framework of

the financial system inthe financial system in

which it works.which it works.

CRAsCRAs evaluate the impactevaluate the impact

of regulation/ deregulationof regulation/ deregulation

on the issuer company.on the issuer company.

Grading SystemGrading System

CRISIL has 4 main grades and a host of subCRISIL has 4 main grades and a host of sub--

gradesgrades.

AAA,AA+, AA, AAAAA,AA+, AA, AA--, A+, A, A, A+, A, A--,,

BBBBBB--, BBB, BBB+,, BBB, BBB+,

BB+, BB, BBBB+, BB, BB--,,

B+, B, BB+, B, B--, C and D., C and D.