Download - IPO Grading (1)
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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.