India Inc's growing appetite for large global merger and acquisition (M&A) deals could tend to deteriorate the corporate credit quality with high debts on balance sheets, according to rating agency 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," a Crisil research paper said.
Indian companies have surged ahead on M&A deals in the first two months of 2007; the volumes in dollar terms have eclipsed those of China's corporates.
Given the ambitious deal sizes, and increasing levels of debt funding and valuations, the credit profiles of companies may be adversely impacted, the paper said.
Unlike in the last two years when strong financial profiles and small size of deals supported M&As, Indian companies today were aiming for large acquisitions, which could change their balance sheets, it added.
"Tata Steel's offer for Corus and Vodafone's bid for Hutchion Whampoa's 67 per cent stake in Hutchison Essar are deals in excess of USD 10 billion each. Such large M&As are likely to affect the financial risk profiles of both the acquiring and acquired entities," the study 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.