iapm assignment -141

8/11/2019 Iapm Assignment -141

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ASSIGNMENT 1 CREDIT RISK

IAPM

SUBMITTED BYSUBHASH ARORA ROLL NO-

141/2013

The Z-score Formula

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

A = Working Capital/Total Assets

B = Retained Earnings/Total Assets

C = Earnings Before Interest & Tax/Total Assets

D = Market Value of Equity/Total Liabilities

E = Sales/Total Assets

The lower the score, the higher the odds are that a company is headed for

bankruptcy. A Z-score of lower than 1.8, in particular, indicates that the company

is heading for bankruptcy. Companies with scores above 3 are unlikely to enter

bankruptcy. Scores in between 1.8 and 3 lie in a gray area.

Breaking down the Z-score:-

Working Capital/Total Assets (WC/TA)

This ratio is a good test for corporate distress. A firm with negative working

capital is likely to experience problems meeting its short-term obligations

because there simply is not enough current assets to cover those

obligations. By contrast, a firm with significantly positive working capital

rarely has trouble paying its bills. (For background reading, see Working

Capital Works.)

Retained Earnings/Total Assets (RE/TA)

This ratio measures the amount of reinvested earnings or losses, which

reflects the extent of the company's leverage. Companies with low RE/TA


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are financing capital expenditure through borrowings rather than through

retained earnings. Companies with high RE/TA suggest a history of

profitability and the ability to stand up to a bad year of losses.

Earnings Before Interest and Tax/Total Assets (EBIT/TA )

This is a version of return on assets (ROA), an effective way of assessing afirm's ability to squeeze profits from its assets before factors

like interest and tax are deducted.

Market Value of Equity/Total Liabilities (ME/TL)

This is a ratio that shows - if a firm were to become insolvent - how much

the company's market value would decline before liabilities exceed assets

on the financial statements. This ratio adds a market value dimension to

the model that isn't based on pure fundamentals. In other words, a durable

market capitalization can be interpreted as the market's confidence in the

company's solid financial position. Sales/Total Assets (S/TA)

this tells investors how well management handles competition and how

efficiently the firm uses assets to generate sales. Failure to grow market

share translates into a low or falling S/TA.

BHARTI AIRTEL

CRISIL downgraded its ratings on Bharti Airtel long-term debt programmes and

bank facilities to 'CRISIL AA+/Stable' from 'CRISIL AAA/Negative' on 26 January,

2013.

The calculations of Altman Zscore for the FY 2012-2013 are shown below:

(Figures in thousands)

PARTICULAR VALUES PARTICULAR VALUES

WORKING CAPITAL(CA-CL)

-340789000 WC/TA -0.21698

TOTAL ASSETS 1570616000 RE/TA 0.251928

EBIT 103850000 EBIT/TA 0.06612

RETAINED

EARNINGS

395682000 ME/TL 0.400704


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MARKET VALUE OF

EQUITY

622846000 SALES/TA 0.454922

TOTAL LIABILITY 1570616000 ALTMANS Z SCORE 1.00886038

SALES 714508000

A Z-score of less than 1.8 indicates high chances of bankruptcy and in the case of

Bharti Airtel the score is 1 showing that the company is slowly heading towards

bankruptcy.

The reasons for downgrade are:

The government has imposed Rs 5,201 crore one-time spectrum fee on

Bharti Airtel for spectrum that the company was allocated apart from the

airwaves that it received bundled with licence. Hence, the potential cash

outflows towards one-time spectrum fees and licence renewal fees are

likely to result in its capital structure taking longer to improve than CRISIL's

previous expectations.

Few of the spectrum licenses are also about to expire and company would

be incurring more expenditure to renew licenses in these circles. This will

lead to worsening of capital structure of the company in the short run.

CRISIL is of the view that Bharti Airtel's gearing will not improve

significantly as on March 31, 2013, despite an equity infusion through an

initial public offer (IPO) in its subsidiary, Bharti Infratel.

However, CRISIL noted that despite intense competition, Bharti Airtel's Indian

operations witnessed a moderate growth of 7.6 per cent in its subscriber base to

185.9 million as on September 30, 2012, from 173 million as on September 30,

2011. The rating agency is expecting Bharti Airtels operating performance in India

to improve on the back of its strong market position, healthy operating

efficiencies, and expectation of reduced competition.


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DLF

DLF is one of the oldest real estate developers in India. The company went public

in 2007. The group is primarily involved in the development and sale of residential

properties, and also in the development and leasing of commercial and retailproperties.

CRISIL downgraded DLF to A from A2+ in 2011. The Altman's z-score for the

company lies below 1.8 indicating that the company is heading towards

bankruptcy. The calculations made are as follows:


WORKINGCAPITAL (CA-CL)

112,690,600,000.00 WC/TA 0.44

TOTAL ASSETS 257,152,300,000.00 RE/TA 0.00

EBIT 12,476,100,000.00 EBIT/TA 0.05

RETAINED

EARNINGS

851,200,000.00 ME/TL 1.35

MARKET VALUE

OF EQUITY

345,944,124,350.00 SALES/TA 0.08

TOTAL LIABILITY 257,152,300,000.00 ALTMANS Z SCORE 1.58SALES 21,500,400,000.00

The probable reasons for the downgrade of the ratings are :

DLFs top line declined by 19 per cent y-o-y in 2012-13 due to fewer

launches. Net margins fell to 8.5 per cent in 2012-13 from 12 per cent in 2011-12 as

interest costs remained high.

Residential inventory levels in the National Capital Region (NCR), Bengaluru

and Chennai - DLFs key markets based on projects under construction - are

higher than the acceptable levels of 10-15 months. A slowing economy and


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high inventory will dampen demand for real estate projects across

developers and segments, and keep potential buyers in a wait-and-watch

mode.

Overexposure to NCR market - While DLF is diversified in terms of exposure

to different real estate segments such as residential, office and retail

spaces, its region of operation is skewed towards the NCR. Gurgaon

accounted for 57 per cent of DLFs revenues from the development

business in 2012-13. This exposes the company to adverse movements in

demand in this region, and consequently in residential capital values and

lease rentals (for office and retail spaces).

Together with a supply overhang across the major cities in India, CRISIL

Research believes lease renewals/ absorption of fresh space could be

impacted, and may also lead to renewals of leases at lower or the same

rates over the medium term.

In 2012-13, DLF launched projects totaling 4.3 million sq ft. This was

significantly lower than the average of 10-12 million sq ft launched during

each of the previous three fiscals.

DLFs high debt levels have been a drag on its net margins over the past

three fiscals. The company has been looking to reduce its outstanding debt

by monetizing non-core assets.

Andhra Bank

Care has downgraded subordinate debt bonds rating of Andhra bank from AAA

to AA+. Company got an Altmans score of 0.78 which is below 1.8, a set

benchmark to rate a company in a safe zone. Andhra bank has been considered tobe a very safe bet for investment in subordinate debts. Even after rating

downgrade, company was considered a good and safe investment.

It happened as the bank reported 15.20% fall in its net profits to Rs. 257.08 crores

for third quarter ended 31, December 2012 compared to Rs. 303.17 crores for the


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same quarter last year. It because of elevated stress on banks loan portfolio,

higher concentration risk and volatile performance.

Andhra Bank is known for managing credit cost but asset quality deteriorated

more than the peers. Restructured loan book also got inflated in recent times andlarge exposure to structurally weak infrastructure sector and some large

corporates. Its gross NPAs also rose from 2.12% to 3.66% in Q3 FY13.


WORKING CAPITAL

(CA-CL) 1149623000

WC/TA 0.78

TOTAL ASSETS 1475593000 RE/TA 0.04EBIT 17607000 EBIT/TA 0.01

RETAINED

EARNINGS

57063000 ME/TL 0.06

MARKET VALUE OF

EQUITY

84541000 SALES/TA 0.03

TOTAL LIABILITY 1475593000 ALTMANS Z SCORE 0.78

SALES 43941000

iapm assignment -141

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