RESEARCH METHODOLOGY

Statement of the problem

The main problem of this research is to understand the effect of the credit rating
change announcements on the stock prices of the company.

Title of the study

“Impact of Credit Rating changes on stock prices of Indian Companies”

Objectives of the study

1. To study the impact of credit rating changes (Upgrades and Downgrades) on the
company’s stock prices and it’s performance.
2.To understand the difference in intensity of impact of announcement effect due to
credit rating changes between upgrades and downgrades.

Research Questions
1.Is there any impact of credit rating changes on the company’s stock prices?
2.Are there any abnormal returns associated with credit rating change
announcements?
3.Is the rating methodology consistent?
4.Is there a systematic link between credit ratings, as indicators of credit risk, and the
return patterns on equity markets?

Type of Research
The research methodology used for this study is descriptive.

Sample Size : Four companies from different sectors are taken into consideration for
the analysis.
Sources of Data
While preparing a report the most important element is data, which provides the
information needed for interpretation and analysis.

Secondary Data: Secondary data is research data that has previously been gathered
and can be accessed by researchers. The term contrasts with primary data, which is
data collected directly from its source .Secondary data was collected through websites
of credit rating agencies and also from the news articles related with the targeted
companies.

PERIOD OF STUDY
The study concerned with the stock prices of TATA Motors Ltd, DHFL,
Fortis Healthcare and Jet Airways was from the period of 2017-2019.

PLAN OF ANALYSIS:

The collected data has been classified and tabulated. This has been done to provide a
clearer view and understanding of the data and for easy interpretation. The data was
analyzed using MS-Excel 2006 and then finding out the relation between the various
factors.

LIMITATIONS OF THE STUDY

The various limitations of the study are:

• Assessment of data: It was difficult to collect data from all the credit rating
agencies and proper assessment is not possible. The conclusions are also based on the
limited data that was available.

• Time constraints: The project had to be undertaken in a specific time duration

which did not permit a proper analysis for all the companies.
• Lack of availability to certain data due to confidentially of information.
Analysis of Data
1. Tata Motors Ltd.

Figure 1 represents the variation in stock prices of TATA Motors Ltd. in the period of
December 27, 2018 to April 05, 2019 with respect to the credit rating changes by
different agencies.

Figure-1

TATA Motors Ltd.

120000000 220

100000000
200
80000000
Volume

Price
60000000 180

40000000
160
20000000

0 140

Dates
Volume Price

 The large cap stock has lost 60.06% since the beginning of this year and fallen
57.20% during the last one year.
 A steep decrease in the stock price can be seen from Rs.182.85 on February 7 to
Rs.150.7 on February 8. This decrease was mainly observed because of the rating
downgrade of the company by Fitch Ratings on February 7.
 Fitch Ratings said on February 6 it has placed the credit rating of India's Tata
Motors Ltd on ‘BB-/negative watch’, stating increasing risks for its British luxury
car unit - Jaguar Land Rover (JLR) - over a potentially chaotic Brexit.
 “Trade barriers and logistic issues from a disorderly Brexit could have an impact
on JLR’s competitive positioning and lead to significantly lower sales and
 profitability,” the credit rating agency said, placing the parent’s long-term issuer
default rating on “rating watch negative”.
 As per S&P, a 'BB' rating indicates an entity's possibility of facing major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
that could lead to the obligator's inadequate capacity to meet its financial
commitments on the obligation.
 Shares of Tata Motors declined over 1 per cent in early trade on March 23 after
S&P downgraded its credit rating and put it on review for a possible further
downgrade due to the growing risks of a no-deal Brexit and US import tariffs.
 S&P cut its rating on senior unsecured notes of JLR and Tata Motors to 'B+' from
'BB-'. The rating downgrade followed JLR's weaker than expected third-quarter
results.
 Company’s shares rose over 8 percent to Rs. 187.35 on BSE on April 1.
 The company's British luxury car unit Jaguar Land Rover (JLR) on March 29
reaffirmed expectations of a financially better fourth quarter.
 JLR said that it will continue to run its turnaround strategy to deliver 2.5 Billion
Euros(USD 2.81 billion) of cash flow improvements by March 2020.

2. Dewan Housing Finance Corporation Ltd.

Figure 2 represents the variation in stock prices of DHFL in the period of December
27, 2018 to April 05, 2019 with respect to the credit rating changes by different
agencies.

Figure 2
 DHFL
140000000 260
120000000 240
220
100000000 200
VOLUME

PRICE
80000000 180
60000000 160
40000000 140
120
20000000 100
0 80

03/03/2019
27/12/2018
02/01/2019
08/01/2019
14/01/2019
20/01/2019
26/01/2019
01/02/2019
07/02/2019
13/02/2019
19/02/2019
25/02/2019

09/03/2019
15/03/2019
21/03/2019
27/03/2019
02/04/2019
DATES
Volume Price

 CARE Ratings on January 31 downgraded the housing finance firm’s non-

convertible debentures (aggregating ₹46,655 crore), fixed deposit programme
(₹20,000 crore) and long-term bank facilities (₹42,714 crore).
 This downgrade had brought repercussions on February 1’s trading in the stock
and corporate debt markets.
 The rating for DHFL has been revised from ‘AAA’ (outlook: stable) to ‘AA+’
due to moderation in the Corporation’s financial flexibility, as evidenced by a
sharp reduction in its share price and significant rise in bond spreads.
 On February 4 shares of Dewan Housing Finance Corporation (DHFL)
rebounded 27 per cent from its intra-day low after the management in the
conference call said that the company is seeking strategic partner to bring fresh
equity.
 Earlier, in the morning trade on February 4, shares of DHFL hit a six-year low of
Rs 97, down 13 per cent on BSE after the rating agency CARE has downgraded
ratings for the company’s bonds, loans on moderation in financial flexibility for
the housing finance company.
 The stock has moved 11 per cent higher at Rs 123, bouncing back 27 per cent
from its early morning low after the management said allegations of financial
irregularities are false.
 ICRA downgraded its short-term rating on DHFL's commercial paper programme
worth Rs 8,000 crore from 'A1+' to 'A2' on February 25 which resulted in the fall
of upto 7.4 percent in the early morning trade.
 ICRA has also kept DHFL on its watchlist with “negative implications”.
 ICRA will continue to monitor the progress on approvals for stake sale of non-
core assets, company’s progress on onboarding a strategic investor as well as
progress on sale of the project finance book and timely execution of these will be
 the key rating sensitivities along with its ability raise fresh funds and resume
normal business.

3.Fortis Healthcare
Figure 3 represents the variation in stock prices of Fortis Healthcare Limited in the
period of August 04, 2017 to April 04, 2019 with respect to the credit rating changes
by different agencies.

Figure 3

FORTIS HEALTHCARE
350000000 170
165
300000000
160
250000000 155
VOLUME

200000000 150

PRICE
145
150000000 140
100000000 135
130
50000000
125
0 120
04/02/2018
04/08/2017
04/09/2017
04/10/2017
04/11/2017
04/12/2017
04/01/2018

04/03/2018
04/04/2018
04/05/2018
04/06/2018
04/07/2018
04/08/2018
04/09/2018
04/10/2018
04/11/2018
04/12/2018
04/01/2019
04/02/2019
04/03/2019
04/04/2019

DATES

Volume Close

 On February 13,2018 credit ratings of Fortis Healthcareand its four arms have
been downgraded by ICRA following disclosure by the healthcare chain about
transfer of considerable funds to third parties, which were later classified as
promoter entities and the current outstanding amount towards such entities is Rs
473 crore.
 The downgrade resulted in the steep fall in the share price at Rs.126.45 on BSE.
 The long term rating for Rs 250 crore non-convertible debenture programme, Rs
105 crore fund-based limits, and Rs 195 crore term loans has been revised from
[ICRA]A+ to [ICRA]A-.
 Further, the short-term rating for Rs 600 crore commercial paper programme and
Rs 20 crore non-fund-based facilities has been revised from [ICRA]A1+ to
[ICRA]A2+
 On February 14, 2018 CARE Ratings has also downgraded the credit ratings of
FHL. The rating agency also took note of the resignations tendered by Malvinder
Singh (Executive Chairman) and Shivinder Singh (Non-executive Vice
Chairman) from the FHL board. Delhi High Court’s recent decision to uphold the
Singapore tribunal’s arbitration order in favour of Daiichi Sankyo also paved the
way for the downgrade.
 The liquidity profile of holding companies is stretched,which leads to delay in
servicing of loans and with significant portion of promoter’s shareholding in FHL
already being pledged, the ability of these companies to raise additional debt is
affected, leading to higher reliance on refinancing and stake sales.
 On March 28,2018 ICRA further downgraded the credit rating of the healthcare
chain to 'C' from BBB.
 C' rating reflects very high risk of default regarding timely servicing of financial
obligations as against moderate degree of safety regarding timely servicing of
financial obligations for 'BBB'.
 This resulted into the huge drop in the stock price of the company in the lowest of
past one year to Rs. 123.35 on BSE.
 On September 21,2018 rating agency ICRA has upgraded its long-term credit
rating as it has repaid the overdue debt obligations and cured the delays in debt
servicing in May 2018. The rating has been upgraded by ICRA from C to B plus.
 The company has arranged additional funds which will enable it in managing its
operations in the short term. However, it will remain reliant on debt funding and
refinancing till the time the proposed deal with IHH Healthcare Bhd is
consummated, it added.
”The conclusion of the deal will be a credit positive as it will result in infusion of
Rs 4,000 crore equity into the company," ICRA said.
 It will also help in funding the exit of private equity investors from SRL Ltd and
in funding the proposed acquisition of assets of Business Trust listed on
Singapore Stock Exchange, leading to elimination of service fees being paid to
BT thus significantly increasing its future EBITDA.

3. Jet Airways
Figure 4 represents the variation in stock prices of Jet Airways in the period of
December 27, 2018 to April 04, 2019 with respect to the credit rating changes by
different agencies.
 Figure 4

JET AIRWAYS
70000000
290
60000000
50000000 270
VOLUME

40000000

PRICE
250
30000000
230
20000000
10000000 210

0 190
03/01/2019
27/12/2018

10/01/2019

17/01/2019

24/01/2019

31/01/2019

07/02/2019

14/02/2019

21/02/2019

28/02/2019

07/03/2019

14/03/2019

21/03/2019

28/03/2019

04/04/2019
DATES
Volume Close

 On May 29,2018 the credit rating agency ICRA downgraded ratings of Jet
Airways’ short-term and long-term debt facilities because of the weak yields and
poor financial performance of the airline which are a result of its inability to pass
on jet fuel price hikes to customers.
 ICRA said it has downgraded the long-term rating assigned to the Rs698.9-crore
non-convertible debenture programme, the Rs3,574.7-crore long-term loans, the
Rs645-crore long-term, fund-based facilities and the Rs600-crore long-term, non-
fund based facilities of Jet Airways (India) Limited to ‘BB+’ from ‘BBB-’.
 According to ICRA, instruments with ‘BB’ rating are considered to have
moderate risk of default regarding timely servicing of financial obligations.
 The effect of credit rating downgrade of the company is evident from the
downfall of stock prices in this period.
 The outlook on the long-term rating is “negative”
 Jet Airways had on 23 May reported a loss of Rs1,036 crore, excluding those of
its units, for the March 2018 quarter, as the airline saw its revenue decline and
costs, especially fuel costs, increase significantly during the quarter.
 On October 05,2018 ICRA downgraded the Jet Airways’ long-term borrowing
programme, showcasing the yet again acute financial crisis of the India’s second
largest airline is facing.
 It downgraded the long-term rating for the airline’s borrowing programme to B
from BB. According to ICRA’s Website, a B rating translates into instruments
 “considered to have high risk of default regarding timely servicing of financial
obligations.
 Inspite of the downgrading the airlines experienced an increase of 11.04 percent
at Rs.197.10 in the stock price at the day end on BSE with analysts attributing the
rise to expectations of an excise duty reduction on jet fuel.
 Shares of cash-strapped Jet Airways plunged as much as 5.6 percent intraday on
January 2 after the company defaulted on a payment to banks and a rating
downgrade by ICRA.
 The airline had said on January 1 that it defaulted on a debt payment to a
consortium of banks led by the State Bank of India.
 ICRA downgraded Jet Airways’ long-term rating from C to D.
 "This rating downgrade considers the delay by the company in the payment of
interest and principal instalment due on December 31, 2018," Jet Airways said in
a statement.
 At 1316 hours, Jet Airways was quoting at Rs 267.90 on the BSE, down 4.68
percent.
 FINDINGS AND CONCLUSIONS

 The findings of the research is broadly classified on the basis of the credit rating
announcement done by the credit rating agencies by taking into account the
various factors into consideration.

 The credit rating change can either be upgraded or downgraded depending upon
the economic conditions and circumstances that the company or the sector is
experiencing.
 The researcher argued that due to wealth redistribution, shareholders benefit from
increased credit risk exposure if the rating decision is primarily based on changes
is related to capital structure and financing options. Also, the information related
to such rating drivers could be of lower relevance for shareholders than
information related to financial performance.