Corporate India’s credit risk profile has remained relatively stable so far and in some cases, it has even improved as a result of mergers and acquisitions (M&A) activity. But the future may be different. With M&As expected to increase, corporate credit quality is likely to deteriorate, says a study by rating firm Crisil.

“While large-scale acquisitions tend to have a positive bearing on the business risk profile of the entities, the incremental debt required to finance the transaction tends to weigh heavily on the financial profile of the combined entity,” says the study. Indian companies in various industry segments are currently aiming for large acquisitions, which could change the scale of their balance sheets. Tata Steel’s offer for Corus and Vodafone’s bid for Hutchison Whampoa’s 67 per cent stake in Hutchison Essar Ltd are deals in excess of $10 billion each (this is almost equal to the aggregate M&A activity in the country in 2006). “Such large M&As are likely to affect the financial risk profiles of both the acquiring and acquired entities,” Crisil said.

The deals, involving sizeable debt funding, are also sensitive to the value addition or synergy benefits from the M&A, and to the outlook on revenue growth, profitability, and the stage of the industry cycle.

Crisil says the euphoria surrounding M&As could well drive corporates to rush into deals without undertaking proper due diligence, especially in understanding the local environment, cultural differences, and legal structure. This may result in painful and expensive adjustments that ultimately impact their credit profiles.

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