Indian Credit Rating Model:

Developing a Non-Convertible Bond

Rating Model for the Indian Debt Markets

by

Shabari Nayak

An honors thesis submitted in partial fulfillment

of the requirements for the degree of

Bachelor of Science

Undergraduate College

Leonard N. Stern School of Business

New York University

May 2004

Professor Marti Subrahmanyam Professor Marti Subrahmanyam

Faculty Adviser Thesis Adviser
Table of Contents

Executive Summary.................................................................................................................... 3
Areas of Study ........................................................................................................................ 5

Correlation of Financial Ratios with Current Credit Ratings..................................................... 5

Methodology........................................................................................................................... 5
Correlation Analysis and Observations .................................................................................. 8

Developing the Indian Credit Rating Model ............................................................................ 10

Contributory Financial Ratios .............................................................................................. 10
Computing ICRM................................................................................................................. 11
Converting ICRM to a Lettered Rating ................................................................................ 12
Results and Findings............................................................................................................. 14

Multiple Discriminant Analysis on ICRM ............................................................................... 18

Methodology......................................................................................................................... 18
Results and Findings............................................................................................................. 19

The Ratings-Change Prediction Power of ICRM..................................................................... 23

Sample Determination and Composition.............................................................................. 23
Methodology......................................................................................................................... 24
Results and Analysis............................................................................................................. 25

Summary and Conclusions ....................................................................................................... 28

Appendices ............................................................................................................................... 29
Appendix 1: Correlation Matrices for CRISIL8 and CRISIL18 .......................................... 29
Appendix 2: ICRM8 and ICRM18 Calculations .................................................................. 33

References ................................................................................................................................ 34

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Executive Summary

Credit risk is commonly defined as the possibility that an issuer of a financial obligation, such
as a debenture, fixed deposit, commercial paper, or structured obligation, will not be able to
repay interest and principal in a timely manner, or in accordance with the terms of the
borrowing agreement. Credit rating agencies, such as the United States-based Moody’s
Investor Services (“Moody’s”) and Standard and Poor’s (“S&P”), are responsible for
analyzing the credit quality of various issuers and assigning a rating to these issuers’
obligations that corresponds to their perceived degree of credit risk. Associated with each
rating, or “risk bucket,” is a probability of default that is derived from historical observations
of the default behavior of companies within each ratings class. As such published ratings
clearly contain significant information concerning the quality and marketability of various
fixed income issues, it is of little surprise that credit ratings are considered a primary source of
investor information in investment decision-making.

In India, four primary agencies provide such credit ratings to the public: Credit Rating
Information Services of India, Ltd (“CRISIL”), Investment Information and Credit Rating
Agency (“ICRA”), Credit Analysis and Research (“CARE”) and Duff & Phelps. The
importance of the services of these agencies in the Indian debt market cannot be
underestimated, especially considering the noteworthy growth in the past decade in the
number of Indian companies raising funds through long-term borrowings, which was
accompanied by growth in the volume of trade of debt instruments in secondary markets in
India. Their role becomes doubly important after taking into consideration the Indian financial
markets’ inefficiency, much like that of most developing countries, as information relevant to
determining creditworthiness may not be publicly available.

The degree of perceived credit risk is also an important facet in the development of debt
markets. India, between 1991 and 1992, experienced a recession that was accompanied by
three consecutive country risk ratings downgrades of two notches each within a span of nine
months, by both primary American ratings agencies. However, a subsequent deregulatory and
de-licensing government movement (deregulation of industry as well as loosening of
restrictions on foreign investment) spurred a period of declining credit risk, mainly due to an
infusion of equity funds from both domestic and international sources. Though this period
lasted through the mid-nineties, more recently, factors specific to the Indian economic system
and the government’s control of corporate entities have caused uncertainty and
unpredictability among investors, a situation which has negatively influenced credit risk.
These factors include low growth rates (possibly a result of a controlled money supply
intended to check inflation), uncertainty in the exchange rate for Indian currency, and the
effect of decreased government expenditure on the growth of the Indian economy
(specifically a reduction in development expenditures which has adversely affected demand
for core industries such as cement and steel). All of these factors have conspired to drive
Indian credit risk higher since 1996. More recently, however, flux in the American economy
and the dwindling faith of American investors in financial statements and earnings forecasts
of domestic companies have served to drive funds into foreign markets, including that of

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India. In recognition of an improving risk profile, S&P upgraded Indian country risk from
Negative to Stable at the end of 2003.

Clearly, the credit risk history of India displays a quality of instability, with major changes in
credit risk occurring within a few years of one another. In such a climate, the role of the credit
rating agency becomes increasingly important as a source of current information concerning
the creditworthiness of the corporations under watch. Recently, credit rating agencies have
come under sharp criticism for failing to respond to events and downgrade suspect companies
with sufficient speed. Enron is perhaps the most well-known example, as credit rating
agencies in the United States maintained investment-grade ratings for that company until as
late as a month prior to its Chapter 11 filings.

In India, CRISIL, the country’s oldest and perhaps most reliable credit ratings provider,
performed a comparably unreliable action when it downgraded BPL Ltd’s long-term
debenture from A to D after the company had already defaulted on that rated obligation. This
incident occurred a mere few years following a mass downgrade of nearly one hundred Indian
companies by CRISIL and ICRA in reaction to public criticism of their ratings practices in
2000. In a country in which illiteracy is high, and in which a significant portion of common
investors do not know how to correctly interpret and analyze the information contained within
public financial statements, the reliability of credit ratings as a means of evaluating potential
fixed income investments becomes increasingly important. In addition to the common
investor, Indian commercial banks often use published credit ratings as a step in a new loan
evaluation, provided that the borrower in question is tracked by a ratings agency.

In part, the problem of the Indian credit rating agencies may lie within the rating process
itself, which is by nature highly dependent on historical data, perhaps largely blind to
macroeconomic complexities and potentially limited in knowledge of industries and
businesses. However, blame lies with the agencies as well, as the data indicates that ratings
agencies substantially overestimated the financial flexibility of traditional corporate houses in
the aforementioned mass downgrade. Past research has also shown that the ratings provided
by the two primary Indian bond rating agencies, CRISIL and ICRA, are becoming extremely
variable over time. The majority of these ratings changes are on the downside, with potential
price risk implications for investors. The consistency of determinant financial ratios between
rating classes also points to probable weakness in rating methodologies, as the significant
financial factors fail to discriminate across rating classes. That is, while the key financial
ratios desirably do not vary for companies belonging to the same ratings class, they also do
not vary across companies belonging to different ratings classes.

These factors conspire to the question of whether an individual Indian investor can self-rate
debt issues using only the financial statements of Indian corporations available to the public.
If such a model rates instruments on par with the ratings provided by the reigning credit rating
agencies in India, then it can be used to rate companies for which ratings information is
unavailable. Furthermore, if the model can predict ratings changes (both upgrades and
downgrades) earlier than changes published by major Indian ratings houses, then it can be
used as a fixed-income investment decision-making tool in lieu of publicly available ratings.

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Areas of Study
The purpose of this paper is to develop a model with which to rate the outstanding non-
convertible debt of Indian corporations, from the perspective of an Indian investor (that is,
without taking into account the country risk of India).

The first section of this study examines the extent of the association between the ratings
published by credit ratings agencies and the financial ratios of companies within a sample set.
The purpose of such an investigation is to potentially determine which ratios, if any, are
closely correlated with the ratings of the credit agencies’ so that they can subsequently be
used in the development of a new ratings model. In the second section of this paper, a debt
scoring model called the Indian Credit Rating Model (“ICRM”) is introduced and calculated
for the various companies included in the sample. The ratings determined by ICRM are then
compared to the ratings published by CRISIL. The third section of this study uses multiple
discriminant analysis to attempt to make ICRM more efficient through the inclusion of
coefficients. Finally, the final section of this paper tests the predictionary power of the ICRM
model with respect to upgrades and downgrades.

Correlation of Financial Ratios with Current Credit Ratings

Perhaps the most important source of information concerning the creditworthiness of a

corporation can be found in the publicly available financial statements issued by said
corporation. As credit rating agencies and relevant credit risk research has focused on the
information contained within financial ratios derived primarily from financial statements, a
novel credit rating model may be developed after close analysis of the correlation between
these ratios and the current ratings of companies in a sample. A model that rates debt issues
on par with the ratings of the leading ratings agency in India, which is one of the primary
goals of this paper, can only be developed by first conducting a correlation analysis between
those ratings and a plethora of potentially influential financial ratios.

For the purposes of this research, the ratings published by CRISIL have been chosen as a
basis for the building of the new model. CRISIL is the oldest of the four primary credit rating
agencies, an important criterion when considering that assigning and monitoring credit ratings
is largely dependent on historical information concerning credit history and default risks. In
addition, CRISIL seems to be the better choice for a comparative tool because past studies
(such as Raghunathan and Varma in 1993 and Chaudhury in 1999) have shown that the
ratings published by CRISIL surpass that of ICRA and CARE based on international
comparability and internal consistency. Also worthy of mention is that the ratings published
by CRISIL seem to be more widely regarded in India as the standard, and are more readily
available to the investing public.

Methodology
The ratings used to analyze correlation matrices are taken from CRISIL’s quarterly-published
Rating Scan, which lists all the firms rated by CRISIL and their ratings at the time of

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publication, from March 2002. The financial statements used to determine the financial ratios
in this analysis have been sourced in the form available on Bloomberg, from the fiscal year
ending March 1999 to the fiscal year ending March 2003.

The design of this paper necessitates that the first and main restriction on the potential sample
for this study be that each included company have an outstanding non-convertible debenture
issue that is rated by CRISIL. Therefore, the raw initial sample of companies included in this
study is simply the one hundred and eight Indian companies covered by CRISIL that have
outstanding non-convertible debt. The importance to this study of available financial
information cannot be understated, as the necessary financial ratios simply cannot be
calculated in the absence of financial statements. As a result, the next restriction placed on the
sample set was the availability of the above five years worth of financial data for all included
companies. The fifty-nine companies remaining after the enforcement of this restriction also
were required to have fiscal years ending in March (which is the prevalent fiscal year end in
India) for the sake of conformity within the data set. In addition, commercial banking
organizations have been excluded, as the standard financial ratios applicable all other included
firms do not apply to the financial statements of commercial banks. A list detailing the sample
for this study, along with the rating of the companies’ outstanding non-convertible debentures
and the sector within which each corporation falls, can be found in the following table.

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 Companies in Study Sample
Company Name Rating Sector
Asian Paints (India) Limited AAA Paints
BASF India Limited AAA Chemicals
Bharat Petroleum Corporation Limited AAA Oil and Gas
Great Eastern Shipping Company Limited AAA Shipping
Hero Honda Motors Limited AAA Two-Wheelers
Hindalco Industries Limited AAA Non-Ferrous Metals
Hindustan Petroleum Corporation Limited AAA Oil and Gas
Larsen & Toubro Limited AAA Diversified
National Aluminium Company Limited AAA Non-Ferrous Metals
Sun Pharmaceutical Industries Limited AAA Pharmaceuticals
Tata Power Company Limited AAA Power
Century Enka Limited AA+ Textiles
Dabur India Limited AA+ Consumer Goods
Electrosteel Castings Limited AA+ Engineering
Raymond Limited AA+ Textiles
Tata Iron & Steel Company Limited AA+ Steel
BOC India Limited AA Diversified
Cadila Healthcare Limited AA Pharmaceuticals
Carborundum Universal Limited AA Engineering
Colour-Chem Limited AA Dyes
Coromandel Fertilisers Limited AA Fertilizers
Finolex Industries Limited AA Petrochemicals
Glenmark Pharmaceuticals Limited AA Pharmaceuticals
Madras Cements Limited AA Cements
Mahindra & Mahindra Limited AA Two-Wheelers
Sterlite Industries (India) Limited AA Non-Ferrous Metals
Tata Chemicals Limited AA Chemicals
Tube Investments Of India Limited AA Diversified
VST Industries Limited AA Tobacco
Ahmedabad Electricity Company Limited AA- Power
Apollo Hospitals Enterprise Limited AA- Diversified
Ashok Leyland Limited AA- Automobiles
E.I.D. Parry (India) Limited AA- Diversified
Finolex Cables Limited AA- Telecommunications
India Glycols Limited AA- Chemicals
Indian Petrochemicals Corporation Limited AA- Petrochemicals
Mahavir Spinning Mills Limited AA- Textiles
Vardhman Spinning & General Mills Limited AA- Textiles
Aarti Industries Limited A+ Chemicals
Apollo Tyres Limited A+ Tires
Chambal Fertilisers & Chemicals Limited A+ Fertilizers
Excel Industries Limited A+ Chemicals
Sudarshan Chemical Industries Limited A+ Dyes
Max India Limited A Diversified
DCM Shriram Consolidated Limited A- Diversified
Thirumalai Chemicals Limited A- Petrochemicals
Gabriel India Limited BBB- Auto Ancillary
Tata Finance Limited BBB- Non-Banking Finance Corporation
Atul Limited BB+ Dyes
Bharat Gears Limited C Auto Ancillary
Amforge Industries Limited D Engineering
Flex Industries Limited D Packaging
Garware Polyester Limited D Textiles
Hindustan Organic Chemicals Limited D Petrochemicals
Jain Irrigation Systems Limited D Plastics
Jindal Iron & Steel Company Limited D Steel
Jindal Vijayanagar Steel Limited D Steel
Mukand Limited D Steel
RPG Transmission Limited D Power

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As is clear from the preceding list, there exists a bias in the sample toward investment-graded
debt. This is largely due to two factors, the first of which is that corporations that choose to
have new issues rated by the agencies tend to have generally stable financials – it is rare in
India for a financially infirm company to seek ratings for an upcoming borrowing. The second
contributory factor to the bias in the sample set is that companies that are non-investment
grade (including companies that have already defaulted on obligations) may delay the release
of financial statements while undergoing debt restructuring proceedings. As the availability of
five years worth of financial data was integral to the pursuit of this study, companies that have
filed inconsistently have been eliminated from the sample. As a result, it is important to keep
in mind that the results of this study will be influenced by a bias towards investment-grade
debt.

Correlation Analysis and Observations

The potentially determinant financial ratios whose correlation with the credit ratings of
CRISIL could be analyzed were found in past research on credit ratings. Edward Altman in
1968, using multiple discriminant analysis, developed a model commonly known as the
Altman Z-Score with which one can determine a company’s propensity to default. The
financial ratios which were included in the Altman Z-Score model are: Working Capital to
Total Assets, Retained Earnings to Total Assets, Earnings before Interest and Taxes (“EBIT”)
to Total Assets, Sales to Total Assets, and Market Value of Equity to Book Value of Debt.
For the purposes of this paper, the financial ratio Market Value of Equity to Book Value of
Debt will not be considered, as this ratio fluctuates on a daily basis with stock price.

Alexander Bathory in 1984 performed similar studies in predicting corporate collapse using
ratios relevant to debt-service ability, profitability, adequacy of reserves, and liquidity. The
ratios included in Bathory’s final model are: Earnings Before Taxation to Capital Employed
(Return on Capital Employed or “ROCE”), Equity to Current Liabilities, Tangible Net Worth
to Total Liabilities, and Working Capital to Total Assets (which has already been included in
this study after the consideration of Altman’s ratios).

S&P uses the following financial ratios in the determination of their published ratings in the
United States: Pre-tax Interest Coverage Ratio (EBIT/Interest), Cash Flow from Operations to
Long-Term Debt, Cash Flow from Operations to Total Debt, Earnings Before Taxes to
Permanent Capital (Return on Net Worth or “RONW”), Operating Income to Sales, Capital to
Long-Term Debt, Capital Plus Short Term Debt to Total Debt, and Equity to Total Liabilities.
Other financial ratios tested in this analysis include Cash Flow to Total Assets, Cash Flow to
Total Debt, Debt to Equity, Interest to Average Debt, Interest to EBITDA (inverse of
EBITDA interest coverage ratio), and Long-Term Debt to Total Assets.

The following table displays the results of an initial correlation analysis of all of the above
financial ratios against the ratings provided by CRISIL, where ratings subcategories have
been eliminated. That is, the scale of potential CRISIL ratings is: AAA, AA, A, BBB, BB, B,
C, and D. As the ratings published by CRISIL are merely rankings, for the purposes of this
correlation analysis, the ratings have been converted to a numerical scale in which AAA-
graded debt receives the highest ranking, 1, and D receives the lowest ranking, 8. Going

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forward, the CRISIL ratings system exclusive of ratings subcategories is referred to as
CRISIL8, where eight represents the number of possible ratings rankings.
CRISIL Without Subcategories
A Priori Signs of
Financial Ratio Correlation p-value Significant at 1% Significant at 5%
Correlation
Working Capital to Total Assets - -0.200 0.132
Retained Earnings to Total Assets - -0.652 0.000 Yes Yes
EBIT to Total Assets - -0.592 0.000 Yes Yes
Sales to Total Assets - -0.371 0.004 Yes Yes
EBT to Capital Employed (Return on Capital Employed) - -0.061 0.651
Equity to Current Liabilities - -0.314 0.016 Yes
Tangible Net Worth to Total Liabilities - -0.512 0.000 Yes Yes
Interest Coverage Ratio + 0.074 0.582
Cash Flow from Operations to Long-Term Debt - -0.378 0.003 Yes Yes
Cash Flow from Operations to Total Debt - -0.305 0.020 Yes
Earnings before Taxes to Permanent Capital (RONW) + 0.192 0.150
Operating Income to Sales - -0.477 0.000 Yes Yes
Capital to Long-Term Debt - -0.276 0.036 Yes
Capital Plus Short-Term Debt to Total Debt - -0.232 0.079
Equity to Total Liabilities - -0.450 0.000 Yes Yes
Cash Flow to Total Assets + 0.014 0.915
Cash Flow to Total Debt + 0.007 0.959
Debt to Equity + 0.592 0.000 Yes Yes
Interest to Average Debt + 0.221 0.095
Interest to EBITDA + 0.474 0.000 Yes Yes
Long-Term Debt to Total Assets - -0.371 0.004 Yes Yes

If the rating subcategories are included (making the CRISIL Ratings System inclusive of
ratings AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, C,
and D), then correlations of the various financial ratios with the CRISIL ratings can be seen in
the following table. In this correlation analysis, AAA is again assigned the highest rating of 1,
while D is assigned the lowest rating of 18. From here on, the CRISIL ratings system
inclusive of ratings subcategories is referred to as CRISIL18, where eighteen again represents
the number of possible ratings classes.
CRISIL with Subcategories
A Priori Signs of
Financial Ratio Correlation p-value Significant at 1% Significant at 5%
Correlation
Working Capital to Total Assets - -0.217 0.102
Retained Earnings to Total Assets - -0.674 0.000 Yes Yes
EBIT to Total Assets - -0.601 0.000 Yes Yes
Sales to Total Assets - -0.367 0.005 Yes Yes
EBT to Capital Employed (Return on Capital Employed) - -0.059 0.661
Equity to Current Liabilities - -0.323 0.013 Yes
Tangible Net Worth to Total Liabilities - -0.528 0.000 Yes Yes
Interest Coverage Ratio + 0.068 0.612
Cash Flow from Operations to Long-Term Debt - -0.380 0.003 Yes Yes
Cash Flow from Operations to Total Debt - -0.303 0.021 Yes
Earnings before Taxes to Permanent Capital (RONW) + 0.179 0.180
Operating Income to Sales - -0.489 0.000 Yes Yes
Capital to Long-Term Debt - -0.285 0.030 Yes
Capital Plus Short-Term Debt to Total Debt - -0.237 0.074
Equity to Total Liabilities - -0.462 0.000 Yes Yes
Cash Flow to Total Assets + 0.033 0.808
Cash Flow to Total Debt + 0.017 0.901
Debt to Equity + 0.596 0.000 Yes Yes
Interest to Average Debt + 0.226 0.089
Interest to EBITDA + 0.469 0.000 Yes Yes
Long-Term Debt to Total Assets + 0.669 0.000 Yes Yes

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As can be seen from the above analysis, the ratios that are significant at a 1% level include
Retained Earnings to Total Assets, EBIT to Total Assets, Sales to Total Assets, Tangible Net
Worth to Total Liabilities, Cash Flow from Operations to Long-Term Debt, Operating Income
to Sales, Equity to Total Liabilities, Debt to Equity, Interest to EBITDA, and Long-Term
Debt to Total Assets. In addition, Equity to Current Liabilities, Cash Flow from Operations to
Total Debt, and Capital to Long-Term Debt are significant at a 5% alpha. These results are
essentially as expected: capital structure ratios (such as Debt to Equity and Long-Term Debt
to Total Assets), interest coverage ratios (such as EBITDA Interest Coverage), company size
factors (Tangible Net Worth to Total Liabilities), and profitability indicators (EBIT to Total
Assets), are highly correlated with the ratings for these instruments. That is, as expected, the
ratings of CRISIL do not depend on ratios in which the common equity investor would be
interested such as Return on Capital Employed or Return on Net Worth, but do instead
depend on those with which a fixed income investor is concerned, such as those detailed
above.

Developing the Indian Credit Rating Model

The main objective of this paper, the development of a new and potentially more effective
credit rating model designed with the Indian debt markets in mind, to be defined here as the
Indian Credit Rating Model (“ICRM”), will now be addressed. The most important facet of
this new model should be its ability to outperform current means of rating Indian debt
instruments, and the model has been developed keeping this goal in mind. It is reasonable to
impute that a credit scoring model that performs as well as outlined above cannot exclude
factors that indicate a company’s ability to service its debt, its profitability, and its size.
Unfortunately, there are several financial ratios that both correlated highly with CRISIL
ratings and that represent such ideas about creditworthiness, and so only the best-performing
ratios are selected from these.

Contributory Financial Ratios

Though many antecedent models were created in this study as stepping stones toward the final
version of ICRM, the final inclusion of financial ratios from the potential list of significant
ratios was dependent on prediction power as proven in past studies and in my research as well
as on ease of computation from publicly filed financial statements. As stated earlier, the ratios
that are significant at a 1% level are Retained Earnings to Total Assets, EBIT to Total Assets,
Sales to Total Assets, Tangible Net Worth to Total Liabilities, Cash Flow from Operations to
Long-Term Debt, Operating Income to Sales, Equity to Total Liabilities, Debt to Equity,
Interest to EBITDA, and Long-Term Debt to Total Assets. A look at the correlation matrices
in Appendix I shows clearly that the ratios Retained Earnings to Total Assets, EBIT to Total
Assets, Sales to Total Assets, Cash Flow From Operations to Long-Term Debt, and Long-
Term Debt to Total Assets are all highly correlated with one another; nearly all of these
correlations are significant at a 1% significance level. As a result, one of these ratios can well-
represent the other four in a new model, and this study, after several trials, has selected Long-
Term Debt to Total Assets.

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Furthermore, Tangible Net Worth to Total Liabilities seems to be significantly correlated with
several other financial ratios, such as Cash Flow from Operations to Long-Term Debt,
Operating Income to Sales, Equity to Liabilities, and Debt to Equity. However, there seems to
be little internal correlation between the other ratios, and so Tangible Net Worth to Total
Liabilities seems to be a good representation of the remaining four ratios.

Both Operating Income to Sales and Interest to EBITDA (the inverse of an EBITDA interest
coverage ratio) display few strong correlations with other financial ratios, while being
strongly correlated with CRISIL ratings themselves, making them robust potential
contributors to the final version of ICRM. Therefore, ICRM will be calculated using those
four financial ratios, specifically, Long-Term Debt to Total Assets, Tangible Net Worth to
Total Liabilities, Operating Income to Sales, and Interest to EBITDA.

Computing ICRM
When reading this section concerning the exact composition of ICRM and the exact method
for its calculation, it is important to keep in mind that ICRM is organized such that the higher
the computed value for ICRM, the higher the ranking when converted from a number system
to the standard lettered ranking system. That is, a company with a positive ICRM value will,
according to the organization of the model, be ranked higher or more creditworthy than a
company with a negative ICRM value.

The first step in calculating ICRM for a company is taking the negative of the value of the
Long-Term Debt to Total Assets ratio. This must be so, as when this ratio is high, it will
indicate a high level of debt, making the company in question riskier to potential lenders, and
thereby making the desired value of ICRM lower.

The second step in calculating ICRM is adding the value of Tangible Net Worth to Total
Liabilities to the value from the first step (or the negative of the value of Long-Term Debt to
Total Liabilities). This value is added because the value of ICRM and Tangible Net Worth to
Total Liabilities should be positively correlated. That is, when the value of Tangible Net
Worth to Total Liabilities is high, a low level of liabilities in comparison to net worth of the
company is indicated, and so the value of ICRM should be correspondingly high.

The third step in the calculation of the ICRM value of a company is the addition of the
Operating Income to Sales value to the previous sum. Companies that have high Operating
Income to Sales ratios are companies that manage their costs well, and are therefore more
likely to have discretionary profits with which to service outstanding debt. Therefore, a high
Operating Income to Sales ratio indicates a lower risk level for debt, and such a company
would likewise command a higher ICRM value.

The final step in the calculation of ICRM is the inclusion of Interest to EBITDA into the
equation. If this ratio is positive, then it should be subtracted from the output of the previous
step. This is because if the annual interest payment is high in comparison to EBITDA, a
metric commonly substituted for incoming cash flow, the risk of the company being unable to
service its outstanding fixed income obligations is higher. However, if a company has a

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negative Interest to EBITDA ratio, due to a negative EBITDA, subtracting that value will
only serve to increase the value of ICRM, which is the polar opposite of the desired effect. In
order to compensate for this potential inaccuracy, if the Interest to EBITDA ratio is negative,
then twice the absolute value of the ratio is subtracted from the output of the previous step in
order to calculate ICRM.

The rationale for this calculation is best explained through an example: consider that the
output from the previous step in the calculation of the ICRM is zero; that is, the sum of
negative Long-Term Debt to Total Assets plus Tangible Net Worth to Total Liabilities plus
Operating Income to Sales is zero. When calculating the ICRM for a company with an
Interest to EBITDA ratio of 1, the value of ICRM will be negative one when one is subtracted
from zero. If, when calculating the ICRM for a second company with an Interest to EBITDA
ratio of -1, the value of the ratio is simply subtracted, the value of the ICRM will be positive
one, which ensures that the second company will be rated higher than the first company in the
example. Even simply subtracting the absolute value of the Interest to EBITDA ratio of the
second company returns an ICRM value of negative one, which only serves to ensure that the
ICRM model will recognize no difference between a company that has an Interest to EBITDA
ratio of positive one and a second company that has an Interest to EBITDA ratio of negative
one. In order to shift the value of ICRM further to the left by an equal value, that is, to make
the ICRM value for the second company negative two, twice the absolute value must be
subtracted for companies having a negative Interest to EBITDA value.

In summary, in the case of a company that has a positive value for the Interest to EBITDA
value, the ICRM is calculated as follows:
LTD TNW OI I
ICRM = − + + −
TA TL Sales EBITDA
If the Interest to EBITDA value is negative, then the ICRM is calculated as follows:
LTD TNW OI I
ICRM = − + + − 2×
TA TL Sales EBITDA

Converting ICRM to a Lettered Rating

The fact that the four ratios that contribute to ICRM all tend to fall within a general range of
possible values, as compared to the excluded financial ratios, is noteworthy. In fact, the
reason that the EBITDA Interest Coverage ratio was inverted was so that it would also fall
within a predictable and reasonable range and could therefore be a contributory factor to
ICRM. The following two tables show the general ranges within which the values for each
financial ratio that contributes to ICRM fall, both intuitively and empirically. The
preponderance of the values of the financial ratios for the companies in the sample for this
study fall within the ranges described below, though data points do exist outside of the
specified ranges.

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 ICRM Co ntributo ry Financial Ratio s Lo w Value fo r Hig h Value fo r
(Po sitiv e Inv e rse Inte re st Co v e rag e ) Financial Ratio Financial Ratio
Negative Long-Term Debt to Total Liabilities -1 0
Total Net Worth to Total Liabilities -1 2
Operating Income to Sales -1 1
Ne gative Interest to EBITDA -1 0
ICRM -4 3

ICRM Co ntributo ry Financial Ratio s Lo w Value fo r Hig h Value fo r

(N e g ativ e Inv e rse Inte re st Co v e rag e ) Financial Ratio Financial Ratio
Negative Long-Term Debt to Total Liabilities -1 0
Total Net Worth to Total Liabilities -1 2
Operating Income to Sales -1 1
Ne gative Twice Absolute Value of Interest to EBITDA -2 0
ICRM -5 3

Though the above tables show that the lowest and highest potential values for ICRM are
negative five and positive three, respectively, empirical data from the sample set for this study
shows that the values will generally fall between a low value of negative two and a high value
of positive one. As a result, these endpoints have been used as guidelines for converting the
value given by ICRM to a lettered rating system. The following two tables show the values
within which ICRM must fall in order to be converted into each CRISIL8 and CRISIL18
ratings class, respectively.
ICRM Conversion with Subcategories
ICRM Value ICRM Rating
0.60 and above AAA
0.30 to 0.59 AA+
ICRM Conversion without Subcategories 0.00 to 0.29 AA
ICRM Value ICRM Rating -0.10 to -0.01 AA-
0.60 and above AAA -0.20 to -0.11 A+
0.30 to 0.59 AA -0.30 to -0.21 A
-0.20 to 0.29 A -0.40 to -0.31 A-
-0.50 to -0.21 BBB -0.50 to -0.41 BBB+
-0.80 to -0.51 BB -0.60 to -0.51 BBB
-1.10 to -0.81 B -0.70 to -0.61 BBB-
-1.4 to -1.11 C -0.80 to -0.71 BB+
-1.41 and below D -0.90 to -0.81 BB
-1.00 to -0.91 BB-
-1.10 to -1.01 B+
-1.20 to -1.11 B
-1.30 to -1.21 B-
-1.40 to -1.31 C
-1.41 and below D

- 13 -
The conversions displayed in the two tables above were determined in the majority by evenly
dividing the values in the range within which ICRM values normally fall, which was earlier
determined to be between negative two and positive one. Theoretically, it should be more
difficult for a company to obtain a rating of AA+ and AAA; that is, a company should prove
its worthiness to be rated such, and so a larger gap is left in ICRM values for those two ratings
classes.

Results and Findings

By following the enumerated guidelines for calculating ICRM, ICRM ratings were calculated
for all fifty-nine companies in the sample for this study and then compared to outstanding
CRISIL ratings for the same companies. ICRM ratings were calculating by first calculating
the values of the determinant financial ratios for all fifty-nine sample companies for the fiscal
years ended March 2002, March 2001, and March 2000, then determining a three-year
average for each ratio, and finally using these three-year averages to calculate an ICRM valid
for March 2002. This averaging of years’ worth of financial data was performed in order to
smooth over potential year-to-year volatility in the values of the ratios, as well as to allow
ICRM to include a historical credit-risk perspective, as is common amongst the practices of
ratings agencies.

The results of the comparison between both the CRISIL8 and ICRM8 ratings (ratings without
subcategories) can be found in the table on the following page.

- 14 -
 CRISIL8 CRISIL8 ICRM8 ICRM8
Lettered Numbered Lettered Numbered
Company Name Rating Rating ICRM Value Rating Rating Difference
Ahmedabad Electricity Company Limited AA 2 0.672 AAA 1 1
Ashok Leyland Limited AA 2 0.138 A 3 -1
Amforge Industries Limited D 8 -1.763 D 8 0
Apollo Hospitals Enterprise Limited AA 2 0.674 AAA 1 1
Asian Paints (India) Limited AAA 1 0.736 AAA 1 0
Apollo Tyres Limited A 3 0.032 A 3 0
Aarti Industries Limited A 3 0.038 A 3 0
Atul Limited BB 5 -0.744 BB 5 0
Basf India Limited AAA 1 0.938 AAA 1 0
Bharat Gears Limited C 7 -1.572 D 8 -1
Bharat Petroleum Corporation Limited AAA 1 -0.005 A 3 -2
Cadila Healthcare Limited AA 2 1.710 AAA 1 1
Century Enka Limited AA 2 1.274 AAA 1 1
Chambal Fertilisers & Chemicals Limited A 3 -0.222 BBB 4 -1
Colour-Chem Limited AA 2 0.713 AAA 1 1
Coromandel Fertilisers Limited AA 2 0.535 AA 2 0
Carborundum Universal Limited AA 2 0.729 AAA 1 1
Dabur India Limited AA 2 0.451 AA 2 0
Dcm Shriram Consolidated Limited A 3 -0.416 BBB 4 -1
E.I.D. Parry (India) Limited AA 2 -0.139 A 3 -1
Electrosteel Castings Limited AA 2 0.828 AAA 1 1
Excel Industries Limited A 3 -0.549 BB 5 -2
Flex Industries Limited D 8 -0.998 B 6 2
Finolex Cables Limited AA 2 2.166 AAA 1 1
Finolex Industries Limited AA 2 0.782 AAA 1 1
Gabriel India Limited BBB 4 -0.491 BBB 4 0
Great Eastern Shipping Company Limited AAA 1 0.598 AA 2 -1
Glenmark Pharmaceuticals Limited AA 2 2.382 AAA 1 1
Garware Polyester Limited D 8 -1.807 D 8 0
Hero Honda Motors Limited AAA 1 1.052 AAA 1 0
Hindalco Industries Limited AAA 1 4.926 AAA 1 0
Hindustan Organic Chemicals Limited D 8 -1.407 D 8 0
Hindustan Petroleum Corporation Limited AAA 1 0.525 AA 2 -1
India Glycols Limited AA 2 0.374 AA 2 0
Boc India Limited AA 2 0.005 A 3 -1
Indian Petrochemicals Corporation Limited AA 2 -0.222 BBB 4 -2
Jindal Vijayanagar Steel Limited D 8 -1.957 D 8 0
Jain Irrigation Systems Limited D 8 -2.517 D 8 0
Jindal Iron & Steel Company Limited D 8 -3.337 D 8 0
Larsen & Toubro Limited AAA 1 -0.337 BBB 4 -3
Max India Limited A 3 0.914 AAA 1 2
Madras Cements Limited AA 2 -0.291 BBB 4 -2
Mahindra & Mahindra Limited AA 2 0.126 A 3 -1
Mahavir Spinning Mills Limited AA 2 0.081 A 3 -1
Mukand Limited D 8 -2.728 D 8 0
National Aluminium Company Limited AAA 1 2.031 AAA 1 0
Raymond Limited AA 2 0.185 A 3 -1
Rpg Transmission Limited D 8 -7.915 D 8 0
Sudarshan Chemical Industries Limited A 3 -0.089 A 3 0
Sterlite Industries (India) Limited AA 2 -0.014 A 3 -1
Sun Pharmaceutical Industries Limited AAA 1 3.473 AAA 1 0
Tube Investments Of India Limited AA 2 0.621 AAA 1 1
Tata Iron & Steel Company Limited AA 2 -0.110 A 3 -1
Thirumalai Chemicals Limited A 3 -0.275 BBB 4 -1
Tata Power Company Limited AAA 1 0.251 A 3 -2
Tata Chemicals Limited AA 2 0.471 AA 2 0
Tata Finance Limited BBB 4 -0.478 BBB 4 0
Vardhman Spinning & General Mills Limited AA 2 -0.360 BBB 4 -2
Vst Industries Limited AA 2 0.176 A 3 -1

- 15 -
As can be seen from the previous table, ICRM rates twenty-four out of fifty-nine companies,
or 40.7% of the sample, exactly on par with the ratings of CRISIL. Of the remaining thirty-
five companies in the sample, ICRM rates fifteen companies just one class lower than
CRISIL, and another eleven companies just one class above the CRISIL rating. That is,
ICRM8 rates 50 companies, or 84.7% of the sample, within one ratings class of published
CRISIL ratings.

A similar analysis was performed using ICRM18 and CRISIL18 ratings, the results of which
can be found in the table on the following page. When expanded to include ratings
subcategories, ICRM rates nineteen companies out of the fifty-nine company sample, or
32.2%, exactly on par with the ratings of CRISIL. Of the remaining forty companies, ICRM
rates eight companies just one notch lower than the corresponding CRISIL rating, and another
eight companies just one notch above the CRISIL rating. Furthermore, ICRM rates an
additional thirteen companies two notches above or below the corresponding CRISIL rating.
This means that ICRM18 rates 81.4% of the sample set of companies within two notches of
their CRISIL rating.

A detailed computation of both ICRM8 and ICRM18 can be found in Appendix II.

- 16 -
 CRISIL18 CRISIL18 ICRM18 ICRM18
Lettered Numbered Lettered Numbered
Company Name Rating Rating ICRM Value Rating Rating Difference
Ahmedabad Electricity Company Limited AA- 4 0.672 AAA 1 3
Ashok Leyland Limited AA- 4 0.138 AA 3 1
Amforge Industries Limited D 18 -1.763 D 18 0
Apollo Hospitals Enterprise Limited AA- 4 0.674 AAA 1 3
Asian Paints (India) Limited AAA 1 0.736 AAA 1 0
Apollo Tyres Limited A+ 5 0.032 AA 3 2
Aarti Industries Limited A+ 5 0.038 AA 3 2
Atul Limited BB+ 11 -0.744 BB+ 11 0
Basf India Limited AAA 1 0.938 AAA 1 0
Bharat Gears Limited C 17 -1.572 D 18 -1
Bharat Petroleum Corporation Limited AAA 1 -0.005 AA- 4 -3
Cadila Healthcare Limited AA 3 1.710 AAA 1 2
Century Enka Limited AA+ 2 1.274 AAA 1 1
Chambal Fertilisers & Chemicals Limited A+ 5 -0.222 A 6 -1
Colour-Chem Limited AA 3 0.713 AAA 1 2
Coromandel Fertilisers Limited AA 3 0.535 AA+ 2 1
Carborundum Universal Limited AA 3 0.729 AAA 1 2
Dabur India Limited AA+ 2 0.451 AA+ 2 0
Dcm Shriram Consolidated Limited A- 7 -0.416 BBB+ 8 -1
E.I.D. Parry (India) Limited AA- 4 -0.139 A+ 5 -1
Electrosteel Castings Limited AA+ 2 0.828 AAA 1 1
Excel Industries Limited A+ 5 -0.549 BBB 9 -4
Flex Industries Limited D 18 -0.998 BB- 13 5
Finolex Cables Limited AA- 4 2.166 AAA 1 3
Finolex Industries Limited AA 3 0.782 AAA 1 2
Gabriel India Limited BBB- 10 -0.491 BBB+ 8 2
Great Eastern Shipping Company Limited AAA 1 0.598 AA+ 2 -1
Glenmark Pharmaceuticals Limited AA 3 2.382 AAA 1 2
Garware Polyester Limited D 18 -1.807 D 18 0
Hero Honda Motors Limited AAA 1 1.052 AAA 1 0
Hindalco Industries Limited AAA 1 4.926 AAA 1 0
Hindustan Organic Chemicals Limited D 18 -1.407 D 18 0
Hindustan Petroleum Corporation Limited AAA 1 0.525 AA+ 2 -1
India Glycols Limited AA- 4 0.374 AA+ 2 2
Boc India Limited AA 3 0.005 AA 3 0
Indian Petrochemicals Corporation Limited AA- 4 -0.222 A 6 -2
Jindal Vijayanagar Steel Limited D 18 -1.957 D 18 0
Jain Irrigation Systems Limited D 18 -2.517 D 18 0
Jindal Iron & Steel Company Limited D 18 -3.337 D 18 0
Larsen & Toubro Limited AAA 1 -0.337 A- 7 -6
Max India Limited A 6 0.914 AAA 1 5
Madras Cements Limited AA 3 -0.291 A 6 -3
Mahindra & Mahindra Limited AA 3 0.126 AA 3 0
Mahavir Spinning Mills Limited AA- 4 0.081 AA 3 1
Mukand Limited D 18 -2.728 D 18 0
National Aluminium Company Limited AAA 1 2.031 AAA 1 0
Raymond Limited AA+ 2 0.185 AA 3 -1
Rpg Transmission Limited D 18 -7.915 D 18 0
Sudarshan Chemical Industries Limited A+ 5 -0.089 AA- 4 1
Sterlite Industries (India) Limited AA 3 -0.014 AA- 4 -1
Sun Pharmaceutical Industries Limited AAA 1 3.473 AAA 1 0
Tube Investments Of India Limited AA 3 0.621 AAA 1 2
Tata Iron & Steel Company Limited AA+ 2 -0.110 A+ 5 -3
Thirumalai Chemicals Limited A- 7 -0.275 A 6 1
Tata Power Company Limited AAA 1 0.251 AA 3 -2
Tata Chemicals Limited AA 3 0.471 AA+ 2 1
Tata Finance Limited BBB- 10 -0.478 BBB+ 8 2
Vardhman Spinning & General Mills Limited AA- 4 -0.360 A- 7 -3
Vst Industries Limited AA 3 0.176 AA 3 0

- 17 -
Multiple Discriminant Analysis on ICRM

Following the development and analysis of ICRM, the question of whether the model can be
made more efficient through the inclusion of coefficients arises. It is possible that the model
will more exactly rate companies, in comparison to CRISIL ratings, should certain financial
ratios be weighted more than others in the calculation of ICRM.

Methodology
In order to test this theory, the four financial ratios that contribute to ICRM are regressed
against CRISIL8 and CRISIL18 ratings. First, however, the Interest to EBITDA ratio is split
into two separate contributing factors, in order to make the regression more consistent with
the idea of the ICRM formula. The first factor is “+I/EBITDA,” which has a value of zero for
any company that has a negative Interest to EBITDA ratio, and has a value equal to Interest to
EBITDA for any company that has a positive value for the ratio. The second factor is “-
I/EBITDA,” which has a value of zero for any company that has a positive Interest to
EBITDA ratio and a value equal to Interest to EBITDA for any company that has a negative
value for the ratio. As a result, the five independent variables that are regressed against
CRISIL ratings in this portion of the study are Long-Term Debt to Total Assets, Tangible Net
Worth to Total Liabilities, Operating Income to Sales, +I/EBITDA, and –I/EBITDA.

ICRM8 inclusive of Multiple Discriminant Analysis (“ICRM8 MD”) was created based on
the following regression data, including variance analysis:
The regression equation is
CRISIL8 = 0.307 + 0.277 TNW/TL - 5.75 OI/Sales + 7.78 LTD/TA + 1.34 +I/EBITDA MD
- 1.69 -I/EBITDA MD

Predictor Coef SE Coef T P

Constant 0.3066 0.5696 0.54 0.593
TNW/TL 0.2766 0.2658 1.04 0.303
OI/Sales -5.754 2.008 -2.86 0.006
LTD/TA 7.783 1.511 5.15 0.000
+I/EBITDA MD 1.3449 0.3609 3.73 0.000
-I/EBITDA MD -1.6875 0.3445 -4.90 0.000

S = 1.22817 R-Sq = 74.8% R-Sq(adj) = 72.5%

Analysis of Variance

Source DF SS MS F P
Regression 5 237.784 47.557 31.53 0.000
Residual Error 53 79.945 1.508
Total 58 317.729

Source DF Seq SS
TNW/TL 1 67.353
OI/Sales 1 30.364
LTD/TA 1 95.716
+I/EBITDA MD 1 8.149
-I/EBITDA MD 1 36.202

- 18 -
From the above information, it is clear that the regression is significant and that the R-
Squared adjusted is sufficiently high to continue this analysis.

ICRM18 inclusive of coefficients, or weightings on the included financial ratios (ICRM18

MD) was created based on the following regression data:
The regression equation is
CRISIL18 = - 1.03 + 0.656 TNW/TL - 13.6 OI/Sales + 19.7 LTD/TA
+ 3.25 +I/EBITDA MD - 4.21 -I/EBITDA MD

Predictor Coef SE Coef T P

Constant -1.026 1.461 -0.70 0.486
TNW/TL 0.6565 0.6820 0.96 0.340
OI/Sales -13.580 5.153 -2.64 0.011
LTD/TA 19.712 3.878 5.08 0.000
+I/EBITDA MD 3.2502 0.9259 3.51 0.001
-I/EBITDA MD -4.2056 0.8838 -4.76 0.000

S = 3.15115 R-Sq = 73.5% R-Sq(adj) = 71.0%

Analysis of Variance

Source DF SS MS F P
Regression 5 1462.57 292.51 29.46 0.000
Residual Error 53 526.28 9.93
Total 58 1988.85

Source DF Seq SS
TNW/TL 1 421.11
OI/Sales 1 171.95
LTD/TA 1 599.08
+I/EBITDA MD 1 45.58
-I/EBITDA MD 1 224.86

Again, it is clear that the regression is significant at a 1% alpha level and that the R-Squared
adjusted is sufficiently high to continue this investigation.

Results and Findings

One of the main benefits of this analysis lies in the fact that no conversion tables are
necessary, as the regression equation yields a value for ICRM8 MD that is already in the form
of a ranked (numbered) credit rating. The results of applying the ICRM8 MD regression
equation to the sample set and then comparing the output to CRISIL8 ratings can be found in
the table on the following page. The values in the column labeled “ICRM8 MD Numbered
Rating” are simply the output from the ICRM8 MD regression equation, rounded such that
there are zero decimal places.

The following table shows that of fifty-nine companies in the sample, ICRM8 MD rated
twenty-three companies, or 40.0% of the sample, exactly on par with CRISIL8 ratings. Of the
remaining thirty-six companies, ICRM8 MD rated twelve companies one ratings class above
and another twelve companies one ratings class below their respective CRISIL8 ratings. That
is, of fifty-nine companies, ICRM8 MD rated forty-seven, or 79.7% of the sample, within one
ratings class of CRISIL8.

- 19 -
 CRISIL8 CRISIL8 ICRM8 MD ICRM8 MD
Lettered Numbered Lettered Numbered
Company Name Rating Rating Rating Rating Difference
Ahmedabad Electricity Company Limited AA 2 AAA 1 1
Ashok Leyland Limited AA 2 AA 2 0
Amforge Industries Limited D 8 BB 5 3
Apollo Hospitals Enterprise Limited AA 2 AA 2 0
Asian Paints (India) Limited AAA 1 AAA 1 0
Apollo Tyres Limited A 3 AA 2 1
Aarti Industries Limited A 3 A 3 0
Atul Limited BB 5 BBB 4 1
Basf India Limited AAA 1 AA 2 -1
Bharat Gears Limited C 7 BB 5 2
Bharat Petroleum Corporation Limited AAA 1 AA 2 -1
Cadila Healthcare Limited AA 2 AA 2 0
Century Enka Limited AA 2 AA 2 0
Chambal Fertilisers & Chemicals Limited A 3 A 3 0
Colour-Chem Limited AA 2 AA 2 0
Coromandel Fertilisers Limited AA 2 AA 2 0
Carborundum Universal Limited AA 2 AAA 1 1
Dabur India Limited AA 2 AA 2 0
Dcm Shriram Consolidated Limited A 3 BBB 4 -1
E.I.D. Parry (India) Limited AA 2 A 3 -1
Electrosteel Castings Limited AA 2 AAA 1 1
Excel Industries Limited A 3 A 3 0
Flex Industries Limited D 8 B 6 2
Finolex Cables Limited AA 2 AAA 1 1
Finolex Industries Limited AA 2 AAA 1 1
Gabriel India Limited BBB 4 A 3 1
Great Eastern Shipping Company Limited AAA 1 A 3 -2
Glenmark Pharmaceuticals Limited AA 2 AA 2 0
Garware Polyester Limited D 8 B 6 2
Hero Honda Motors Limited AAA 1 AAA 1 0
Hindalco Industries Limited AAA 1 AAA 1 0
Hindustan Organic Chemicals Limited D 8 BB 5 3
Hindustan Petroleum Corporation Limited AAA 1 AAA 1 0
India Glycols Limited AA 2 A 3 -1
Boc India Limited AA 2 BBB 4 -2
Indian Petrochemicals Corporation Limited AA 2 A 3 -1
Jindal Vijayanagar Steel Limited D 8 C 7 1
Jain Irrigation Systems Limited D 8 C 7 1
Jindal Iron & Steel Company Limited D 8 D 8 0
Larsen & Toubro Limited AAA 1 A 3 -2
Max India Limited A 3 BBB 4 -1
Madras Cements Limited AA 2 BBB 4 -2
Mahindra & Mahindra Limited AA 2 A 3 -1
Mahavir Spinning Mills Limited AA 2 A 3 -1
Mukand Limited D 8 D 8 0
National Aluminium Company Limited AAA 1 AAA 1 0
Raymond Limited AA 2 A 3 -1
Rpg Transmission Limited D 8 D 10 -2
Sudarshan Chemical Industries Limited A 3 A 3 0
Sterlite Industries (India) Limited AA 2 A 3 -1
Sun Pharmaceutical Industries Limited AAA 1 AAA 1 0
Tube Investments Of India Limited AA 2 AA 2 0
Tata Iron & Steel Company Limited AA 2 A 3 -1
Thirumalai Chemicals Limited A 3 AA 2 1
Tata Power Company Limited AAA 1 A 3 -2
Tata Chemicals Limited AA 2 AA 2 0
Tata Finance Limited BBB 4 A 3 1
Vardhman Spinning & General Mills Limited AA 2 BBB 4 -2
Vst Industries Limited AA 2 AA 2 0

- 20 -
The results of applying the ICRM18 MD regression equation to the sample set and then
comparing the output to CRISIL18 ratings can be found in the following table. The values in
the column labeled “ICRM18 MD Numbered Rating” are simply the output from the ICRM18
MD regression equation, rounded such that there are zero decimal places.

The table shows that out of a fifty-nine company sample, ICRM18 MD rates twelve
companies, or 20.3% of the sample, exactly on par with CRISIL ratings. Fourteen companies
are just rated one notch away from CRISIL18 (above and below), and another twelve
companies are rated two notches away from CRISIL. That is, ICRM18 MD rates a total of
thirty-eight companies, or 64.4% of the sample set, within two notches of CRISIL18 ratings.

- 21 -
 CRISIL18 CRISIL18 ICRM18 MD ICRM18 MD
Lettered Numbered Lettered Numbered
Company Name Rating Rating Rating Rating Difference
Ahmedabad Electricity Company Limited AA- 4 AAA 1 3
Ashok Leyland Limited AA- 4 AA 3 1
Amforge Industries Limited D 18 BBB- 10 8
Apollo Hospitals Enterprise Limited AA- 4 AA- 4 0
Asian Paints (India) Limited AAA 1 AAA 1 0
Apollo Tyres Limited A+ 5 AA- 4 1
Aarti Industries Limited A+ 5 A- 7 -2
Atul Limited BB+ 11 BBB 9 2
Basf India Limited AAA 1 AA+ 2 -1
Bharat Gears Limited C 17 BBB- 10 7
Bharat Petroleum Corporation Limited AAA 1 AA- 4 -3
Cadila Healthcare Limited AA 3 AA 3 0
Century Enka Limited AA+ 2 AA 3 -1
Chambal Fertilisers & Chemicals Limited A+ 5 A 6 -1
Colour-Chem Limited AA 3 AA+ 2 1
Coromandel Fertilisers Limited AA 3 AA+ 2 1
Carborundum Universal Limited AA 3 AAA 1 2
Dabur India Limited AA+ 2 AA+ 2 0
Dcm Shriram Consolidated Limited A- 7 BBB 9 -2
E.I.D. Parry (India) Limited AA- 4 A 6 -2
Electrosteel Castings Limited AA+ 2 AA+ 2 0
Excel Industries Limited A+ 5 A 6 -1
Flex Industries Limited D 18 B+ 14 4
Finolex Cables Limited AA- 4 AAA 1 3
Finolex Industries Limited AA 3 AAA 1 2
Gabriel India Limited BBB- 10 A- 7 3
Great Eastern Shipping Company Limited AAA 1 A+ 5 -4
Glenmark Pharmaceuticals Limited AA 3 AA 3 0
Garware Polyester Limited D 18 B+ 14 4
Hero Honda Motors Limited AAA 1 AAA 1 0
Hindalco Industries Limited AAA 1 AAA 1 0
Hindustan Organic Chemicals Limited D 18 BB 12 6
Hindustan Petroleum Corporation Limited AAA 1 AAA 1 0
India Glycols Limited AA- 4 A+ 5 -1
Boc India Limited AA 3 BBB+ 8 -5
Indian Petrochemicals Corporation Limited AA- 4 A 6 -2
Jindal Vijayanagar Steel Limited D 18 B- 16 2
Jain Irrigation Systems Limited D 18 B- 16 2
Jindal Iron & Steel Company Limited D 18 D 19 -1
Larsen & Toubro Limited AAA 1 A- 7 -6
Max India Limited A 6 BBB 9 -3
Madras Cements Limited AA 3 BBB+ 8 -5
Mahindra & Mahindra Limited AA 3 A+ 5 -2
Mahavir Spinning Mills Limited AA- 4 A 6 -2
Mukand Limited D 18 C 17 1
National Aluminium Company Limited AAA 1 AAA 1 0
Raymond Limited AA+ 2 A 6 -4
Rpg Transmission Limited D 18 D 22 -4
Sudarshan Chemical Industries Limited A+ 5 A 6 -1
Sterlite Industries (India) Limited AA 3 A+ 5 -2
Sun Pharmaceutical Industries Limited AAA 1 AAA 1 0
Tube Investments Of India Limited AA 3 AA+ 2 1
Tata Iron & Steel Company Limited AA+ 2 A+ 5 -3
Thirumalai Chemicals Limited A- 7 AA- 4 3
Tata Power Company Limited AAA 1 A+ 5 -4
Tata Chemicals Limited AA 3 AA 3 0
Tata Finance Limited BBB- 10 A+ 5 5
Vardhman Spinning & General Mills Limited AA- 4 BBB+ 8 -4
Vst Industries Limited AA 3 AA- 4 -1

- 22 -
Although ICRM8 MD and ICRM18 MD are both valid and significant credit rating models of
their own right, the original ICRM8 and ICRM18 models seem to have more explanatory
power in rating on par with the credit ratings published by CRISIL. For this reason, this study
will consider only the original ICRM8 and ICRM18 models in further areas of investigation.

The Ratings-Change Prediction Power of ICRM

It is undoubtedly remarkable that ICRM has such a strong ability to rate non-convertible
debentures on par with the ratings of CRISIL, especially considering that it is composed of
four simple financial ratios while the ratios of CRISIL take into consideration both a wider
array of financial indicators as well as qualitative factors such as the state of the Indian
economy and that of the specific industry within which the firm in question operates.
However, the next test which ICRM must survive, for it to fulfill the requirements of this
study, is the investigation of its forecasting power with respect to ratings upgrades and
downgrades published by CRISIL. In order to maintain the integrity of this study, an entirely
different sample has been created in order to test the predicting ability of ICRM, with respect
to both the companies included and the time during which ratings are tested.

Sample Determination and Composition

As the purpose of this section of the study is to determine whether ICRM can predict ratings
changes published by CRISIL before their actual publication, it is imperative that the
companies in any sample for this section have been upgraded or downgraded within the time
frame of the sample. As the earlier section of this analysis compared CRISIL and ICRM
ratings as of March 31, 2002, this section of the study will explore changes in ratings since
that time – that is, this section will focus on ratings changes during the Indian fiscal years
ended March 2003 and March 2004. As the sample must include companies that have
experienced ratings changes, the initial raw sample for this section was determined by
gathering information from CRISIL’s semiannually-published Ratings Roundup, a pamphlet
that details all ratings changes that occurred in the six months prior to publication.

Again, the initial sample size of forty-three was restricted by the availability of financial
statements, which were obtained from Bloomberg as before. After additional restrictions that
excluded companies with fiscal years that did not end in March and banking institutions, the
final sample size consisted of nineteen companies, twelve of which are companies that have
been upgraded by CRISIL and seven of which are firms that have been downgraded by
CRISIL. The final companies included in the sample, including their sector, the date of the
associated ratings change, and the actual ratings changes themselves, are shown in the table
below.

- 23 -
 Upgrades
Company Name Sector Upgrade Date Upgrade From Upgrade To
Gujarat Gas Company Limited Oil and Gas Aug-03 AA+ AAA
Tata Finance Limited Non-Banking Finance Corporation May-03 BBB- BBB
The Arvind Mills Limited Textiles Jun-03 D BB
The Tata Iron and Steel Company Limited Steel Aug-03 AA+ AAA
Apollo Tyres Limited Tires Mar-03 A+ AA-
DCM Shriram Consolidated Limited Diversified Oct-03 A- A
Finolex Industries Limited Petrochemicals Dec-03 AA- AA
Gabriel India Limited Auto Ancillary Nov-03 BBB- BBB+
Indian Petrochemicals Corporation Limited Petrochemicals Jan-04 AA- AA
Kalyani Steels Limited Steel Oct-03 D BB
Tata Chemicals Limited Chemicals Apr-04 AA AA+
Century Enka Limited Textiles Feb-04 AA AA+

Downgrades
Company Name Sector Downgrade Date Downgrade From Downgrade To
BPL Limited Consumer Durables May-03 A- D
Excel Industries Limited Chemicals Dec-03 A+ A-
Madras Cements Limited Cements Jan-04 AA AA-
Max India Limited Diversified Mar-04 A BB
Sterlite Industries (India) Limited Non-Ferrous Metals Feb-04 AA AA-
Tata Power Company Limited Power Mar-04 AAA AA+
Thirumalai Chemicals Limited Chemicals Nov-03 A- BBB+

As can be seen from the table above, the sample seems to have a bias towards upgrades as
opposed to downgrades. This may be due to the fact that the two fiscal years considered for
the determination of this sample were characterized by improving credit fundamentals, strong
capital-market conditions and low interest costs, allowing companies to improve their capital
structures by replacing high-cost borrowings with significantly cheaper loans. This
widespread improvement in the overall credit profile of Indian companies has led CRISIL to
upgrade the long-term ratings of fourteen firms and downgrade those of just five in the year to
March 2004, compared to fourteen upgrades and nineteen downgrades in the previous year.
Essentially, there were more upgrades than downgrades during the sample period. In addition,
as before, financial statements are difficult to obtain for companies that have been
downgraded, especially to default (D) ratings, and so these companies were excluded on the
basis of unavailability of information. Regardless, it is important to keep in mind that the
results of the data have been based on a sample that is slightly biased towards upgrades as
opposed to downgrades.

Methodology
As all of the ratings actions taken by CRISIL in the sample set above occur after March of
2003, financial statements from the fiscal year ended March of 2003 are used for the exercise
of this research. Although quarterly statements would be a better substitute, Indian regulatory
agencies are relatively lax when compared to the Securities and Exchange Commission (SEC)
of the United States, and as a result full and accurate historical quarterly data is somewhat
difficult to obtain, especially for one outside of India.

Because many of the CRISIL ratings changes are for upgrades or downgrades one or two
notches within a ratings class, ICRM18 (ICRM with ratings subcategories) is used for this
analysis. ICRM18 values are calculated for all nineteen companies in the above sample by
calculating financial ratios for the fiscal years ended March 2003, March 2002, and March
2001, and averaging those ratios in order to determine an ICRM value that is valid for the

- 24 -
March 2003 time period. These ICRM values are then converted to ICRM ratings, as detailed
previously, and compared to the ratings upgrades and downgrades published by CRISIL
during that time period. The following table details this calculation and comparison for each
of the nineteen companies included in the sample set. The table also includes the ratings of
each company as of March 2002, that is, the ratings as per the previous study examining if
ICRM rates companies on par with CRISIL ratings, for the sake of comparison purposes.

Upgrades
Lettered Lettered
Company Name Date From To ICRM18 2002 ICRM18 2003 Predict Upgrade
Gujarat Gas Company Limited Aug-03 AA+ AAA AA AAA Yes
Tata Finance Limited May-03 BBB- BBB BBB+ BBB- No
The Arvind Mills Limited Jun-03 D BB D D No
The Tata Iron and Steel Company Limited Aug-03 AA+ AAA A A+ Yes
Apollo Tyres Limited Mar-03 A+ AA- A+ AA Yes
DCM Shriram Consolidated Limited Oct-03 A- A BBB BBB+ Yes
Finolex Industries Limited Dec-03 AA- AA AAA AA Yes
Gabriel India Limited Nov-03 BBB- BBB+ BBB- BBB+ Yes
Indian Petrochemicals Corporation Limited Jan-04 AA- AA A- A+ Yes
Kalyani Steels Limited Oct-03 D BB D BB- Yes
Tata Chemicals Limited Apr-04 AA AA+ AA- AA+ Yes
Century Enka Limited Feb-04 AA AA+ AA+ AA+ Yes

Downgrades
Lettered Lettered
Company Name Date From To ICRM18 2002 ICRM18 2003 Predict Downgrade
BPL Limited May-03 A- D BBB+ D Yes
Excel Industries Limited Dec-03 A+ A- BB+ BBB- No
Madras Cements Limited Jan-04 AA AA- BBB+ BBB+ No
Max India Limited Mar-04 A BB BBB B+ Yes
Sterlite Industries (India) Limited Feb-04 AA AA- A A Yes
Tata Power Company Limited Mar-04 AAA AA+ A+ A Yes
Thirumalai Chemicals Limited Nov-03 A- BBB+ BBB+ BBB+ Yes

Results and Analysis

The results of the examination of the prediction power of the ICRM model, to be fully
understood, must be analyzed on a company-by-company basis. The reason for the entries in
the last column of the table above, “Predict Upgrade” and “Predict Downgrade” are
enumerated in this analysis.

Gujarat Gas Company Limited: Although in March of 2002, ICRM predicted a rating for
Gujarat Gas that was one notch below CRISIL ratings, not only did ICRM predict the upgrade
for this company, but it predicted the new rating exactly (zero difference between CRISIL
upgraded rating and ICRM rating in March 2003). In addition, ICRM predicted this ratings
upgrade by March of 2003, a full five months prior to the CRISIL upgrade.

Tata Finance Limited: In the case of this company, the initial ratings provided by CRISIL and
ICRM differed by two notches: ICRM rated the company BBB+ whereas CRISIL rated the
company BBB-. The May 2003 ratings upgrade action by CRISIL is accompanied by a March
2003 downgrade prediction to BBB- by ICRM.

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The Arvind Mills Limited: Though CRISIL upgrades Arvind Mills from default (D rating) to a
BB rating in June of 2003, ICRM in March of 2003 maintains its D rating for the company.
Though it is possible that the company’s financials significantly improve in the quarter
between March and June, it is more likely that CRISIL upgrades the company out of default
based on qualitative characteristics such as the completion of deals with lenders common to
restructuring practices.

The Tata Iron and Steel Company Limited: Though ICRM did not agree with CRISIL
concerning the initial rating for the firm (before any ratings changes), ICRM did predict an
increase in the rating of the company by one notch. In fact, ICRM predicts this upgrade five
months before action is taken by CRISIL.

Apollo Tyres Limited: In April of 2003, CRISIL upgraded the rating of Apollo Tyres one
notch from A+ to AA-. ICRM predicts a ratings upgrade in March of 2003, but foresees a
ratings upgrade of two notches from A+ to AA.

DCM Shriram Consolidated Limited: Although CRISIL and ICRM disagree concerning the
rating of DCMS, ICRM predicts an upgrade of one notch (from BBB to BBB+) in March of
2003 that is followed by an actual ratings upgrade of one notch (from A- to A) by CRISIL in
October of 2003.

Finolex Industries Limited: CRISIL and ICRM disagree widely concerning the credit risk of
this company in March of 2002, but a ratings upgrade by CRISIL in December of 2003 and a
ratings downgrade prediction by ICRM in March of 2003 ensure that the two models see eye
to eye – both models rate Finolex AA by the end of December 2003.

Gabriel India Limited: CRISIL upgraded this company from BBB- to BBB+ in November of
2003, a ratings action that was exactly predicted by ICRM in March of 2003, a full eight
months in advance.

Indian Petrochemicals Corporation Limited: Although the two models disagree on the initial
rating of the company, ICRM does indeed predict a ratings upgrade in March 2003 of two
notches that is followed by an actual ratings upgrade by CRISIL in January 2004.

Kalyani Steels Limited: In March of 2003, ICRM predicts a ratings upgrade for this company
from default (D rating) to BB-. This prediction is valid, as in October of 2003, CRISIL
updates the company out of default to a BB rating.

Tata Chemicals Limited: ICRM predicts a credit upgrade for Tata Chemicals in March 2003
to AA+, a prediction that sees reality when CRISIL upgrades the company to AA+ in April of
2004. This prediction is especially remarkable as it comes thirteen months in advance.

Century Enka Limited: In the case of Century Enka, ICRM maintains a rating of AA+ for this
company since March of 2002. Although in March of 2002, CRISIL rates Century Enka AA,

- 26 -
it is upgraded to AA+ in February of 2004, making the CRISIL rating correspond with the
rating that ICRM has maintained for a substantial period of time.

BPL Limited: BPL is a special case in that Indian investors were infuriated when CRISIL
downgraded the company’s outstanding long-term debentures from A- to default a week
following the company’s announced default. In this case, ICRM predicts the default of BPL in
March of 2003, a full two months before the company actually defaulted on its rated
obligations.

Excel Industries Limited: This is a case in which ICRM and CRISIL again disagree with the
initial ratings of the company. However, with respect to Excel Industries, ICRM predicts an
upgrade from BB+ to BBB-, while CRISIL later downgrades the rated obligations of the
company from A+ to A-.

Madras Cements Limited: ICRM rates this company BBB+ and maintains that rating over the
years in consideration. However, in January of 2004, CRISIL downgraded the long-term
borrowings of this company from AA to AA-.

Max India Limited: Although CRISIL and ICRM ratings disagree initially, ICRM does
predict a ratings downgrade of five notches in March of 2003 from BBB to B+. This is
followed in March of 2004 by a ratings downgrade action by CRISIL of five notches from A
to BB+.

Sterlite Industries (India) Limited: ICRM has maintained a rating of A for Sterlite for the two
years in consideration in this study. However, in February of 2004, CRISIL downgrades
Sterlite from AA to AA-. What is not shown in the above table is that in April of 2004,
CRISIL again upgraded the Sterlite debentures back to AA, thereby effectively maintaining a
steady rating for the company over the time period in question, as predicted by ICRM.

Tata Power Company Limited: Although ICRM does not believe that Tata Power deserves a
rating of AAA initially, it does predict a ratings downgrade of one notch, from A+ to A. This
prediction is seen to reality when CRISIL downgrades Tata Power from AAA to AA+ (one
notch) in March of 2004.

Thirumalai Chemicals Limited: In this final case, ICRM predicts and maintains a rating of
BBB+ for the company in the years under study. Although CRISIL originally rates the
obligations of the company A-, in November of 2003 the debt is downgraded to BBB+,
thereby fulfilling the prediction of ICRM.

Out of nineteen companies that experienced ratings upgrades and downgrades, ICRM was
able to predict either the exact ratings change, or at the very least the direction and extent of
the ratings change in the case of fifteen companies. This indicates that not only does ICRM
rate obligations on par with the ratings of CRISIL as shown in the earlier portion of the study,
but also has predictionary power for ratings changes.

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Summary and Conclusions

The purpose of this paper was to develop a model with which to rate the outstanding non-
convertible debt of Indian corporations, from the perspective of an Indian investor. The model
should ideally rate companies on par with the ratings of the leading Indian credit rating
agency, CRISIL, and be able to predict ratings upgrades and downgrades before published by
the agency.

The first section of this study examined the extent of the association between the ratings
published by credit ratings agencies and the financial ratios of companies within a sample set.
The purpose of such an investigation was to determine which ratios are closely correlated
with the ratings of the credit agencies, so that they could subsequently be used in the
development of a new ratings model. In the second section of this paper, a debt scoring model
called the Indian Credit Rating Model (“ICRM”) was introduced and calculated for the
various companies included in the sample. The ratings determined by ICRM were then
compared to the ratings published by CRISIL, with strong results. The third section of this
study used multiple discriminant analysis to attempt to make ICRM more efficient through the
inclusion of coefficients, an attempt that was unsuccessful. Finally, the final section of this
paper tested the predictionary power of the ICRM model with respect to upgrades and
downgrades, and yielded favorable results.

This study developed a model that was not only able to rate companies on par with the ratings
of the primary credit ratings agency in India, CRISIL, but was also able to predict the
direction and degree of ratings changes before such ratings changes were published by
CRISIL. These findings indicate that CRISIL may give significant weight to financial
statements (as opposed to qualitative company-specific, industry, and economic information)
when determining its credit scores, as its ratings can be matched by a model that uses only
financial statements. In addition, as ICRM can predict ratings changes far in advance of their
announcement, CRISIL may adopt a type of wait-and-watch policy in publishing ratings
upgrades and downgrades.

As a result of this study, I find that ICRM is a good means of determining credit scores for
companies that are unrated by any of the primary credit ratings agencies of India.
Nonetheless, with respect to investment decision-making, it remains important to supplement
an ICRM analysis with a scrutiny of a variety of qualitative variables that can affect the
creditworthiness of a firm, such as the economic climate, the situation of the industry in which
the company operates, the political environment that exists during the time of the analysis, the
quality and mindset of the firm’s management, etc.

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Appendices
Appendix 1: Correlation Matrices for CRISIL8 and CRISIL18
Correlation Matrix: CRISIL8 and Financial Ratios, Part I
Financial Ratio CRISIL8 Ratin WC/TA RE/TA EBIT/TA Sales/TA ROCE E/CL
WC/TA -0.088
0.506
RE/TA -0.676 0.219
0.000 0.095
EBIT/TA -0.598 0.179 0.405
0.000 0.176 0.001
Sales/TA -0.343 -0.052 0.096 0.498
0.008 0.696 0.468 0.000
ROCE -0.550 0.075 0.316 0.968 0.613
0.000 0.571 0.015 0.000 0.000
E/CL -0.303 0.182 0.656 0.124 -0.259 0.001
0.020 0.167 0.000 0.350 0.048 0.995
TNW/TL -0.454 0.270 0.854 0.343 -0.055 0.223 0.857
0.000 0.039 0.000 0.008 0.682 0.089 0.000
IC 0.004 0.241 0.067 -0.325 -0.370 -0.486 0.177
0.979 0.066 0.614 0.012 0.004 0.000 0.179
CFO/LTD -0.314 -0.082 0.340 0.712 0.501 0.793 0.079
0.016 0.535 0.008 0.000 0.000 0.000 0.553
CFO/TD -0.302 0.141 0.425 0.635 0.308 0.607 0.213
0.020 0.286 0.001 0.000 0.018 0.000 0.105
RONW 0.195 -0.052 0.136 -0.180 0.089 -0.161 0.011
0.138 0.697 0.306 0.173 0.501 0.223 0.931
OI/Sales -0.462 0.150 0.248 0.620 -0.117 0.488 0.333
0.000 0.258 0.058 0.000 0.376 0.000 0.010
C/LTD -0.191 0.569 0.445 0.290 0.003 0.173 0.295
0.148 0.000 0.000 0.026 0.985 0.189 0.023
C+STD/TD -0.195 0.476 0.434 0.324 0.037 0.215 0.273
0.138 0.000 0.001 0.012 0.778 0.102 0.037
E/L -0.423 0.282 0.841 0.304 -0.080 0.188 0.859
0.001 0.031 0.000 0.019 0.549 0.154 0.000
CF/TA 0.014 0.270 0.015 0.327 -0.002 0.330 0.106
0.915 0.038 0.913 0.011 0.986 0.011 0.425
CF/TD -0.035 0.188 0.106 0.129 0.019 0.096 0.102
0.792 0.155 0.426 0.332 0.887 0.471 0.444
D/E 0.588 -0.202 -0.678 -0.283 -0.272 -0.256 -0.290
0.000 0.125 0.000 0.030 0.037 0.050 0.026
I/AD 0.087 0.364 0.149 -0.102 -0.116 -0.176 0.011
0.514 0.005 0.259 0.442 0.381 0.182 0.936
I/EBITDA 0.091 -0.095 -0.114 -0.106 -0.146 -0.079 -0.015
0.493 0.473 0.390 0.424 0.271 0.551 0.910
LTD/TA 0.663 -0.063 -0.765 -0.458 -0.451 -0.476 -0.258
0.000 0.636 0.000 0.000 0.000 0.000 0.048

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 Correlation Matrix: CRISIL8 and Financial Ratios, Part II
Financial Ratio TNW/TL IC CFO/LTD CFO/TD RONW OI/Sales C/LTD
IC 0.160
0.227
CFO/LTD 0.302 -0.737
0.020 0.000
CFO/TD 0.492 -0.226 0.783
0.000 0.085 0.000
RONW 0.009 -0.015 -0.006 -0.019
0.946 0.912 0.967 0.885
OI/Sales 0.382 0.104 0.191 0.275 -0.513
0.003 0.435 0.148 0.035 0.000
C/LTD 0.604 0.257 0.172 0.528 0.005 0.198
0.000 0.049 0.193 0.000 0.969 0.132
C+STD/TD 0.598 0.226 0.246 0.623 -0.011 0.207 0.981
0.000 0.085 0.060 0.000 0.934 0.116 0.000
E/L 0.992 0.166 0.296 0.514 0.024 0.323 0.618
0.000 0.209 0.023 0.000 0.859 0.013 0.000
CF/TA 0.107 -0.124 0.267 0.243 0.008 0.144 0.273
0.420 0.349 0.041 0.064 0.953 0.277 0.037
CF/TD 0.229 -0.022 0.058 0.057 0.017 0.070 0.628
0.082 0.867 0.661 0.670 0.896 0.597 0.000
D/E -0.417 0.013 -0.243 -0.233 -0.136 0.014 -0.197
0.001 0.924 0.063 0.076 0.304 0.916 0.135
I/AD 0.232 0.282 -0.212 -0.053 0.136 -0.067 0.651
0.077 0.030 0.106 0.693 0.304 0.616 0.000
I/EBITDA -0.111 0.022 -0.115 -0.109 0.031 -0.005 -0.101
0.404 0.871 0.386 0.410 0.815 0.970 0.445
LTD/TA -0.590 0.104 -0.499 -0.458 -0.070 -0.107 -0.315
0.000 0.435 0.000 0.000 0.596 0.419 0.015

Correlation Matrix: CRISIL8 and Financial Ratios, Part III

Financial Ratio C+STD/TD E/L CF/TA CF/TD D/E I/AD I/EBITDA
E/L 0.617
0.000

CF/TA 0.251 0.095

0.055 0.476

CF/TD 0.600 0.216 0.372

0.000 0.100 0.004

D/E -0.191 -0.403 0.037 -0.035

0.147 0.002 0.779 0.792

I/AD 0.600 0.218 0.151 0.676 -0.035

0.000 0.097 0.252 0.000 0.795

I/EBITDA -0.105 -0.095 -0.039 -0.024 0.167 -0.065

0.428 0.475 0.772 0.857 0.205 0.623

LTD/TA -0.341 -0.574 0.028 -0.053 0.645 -0.105 0.330

0.008 0.000 0.833 0.688 0.000 0.428 0.011

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 Correlation Matrix: CRISIL18 and Financial Ratios, Part I
CRISIL18
Financial Ratio Rating WC/TA RE/TA EBIT/TA Sales/TA ROCE E/CL
WC/TA -0.104
0.431
RE/TA -0.683 0.219
0.000 0.095
EBIT/TA -0.604 0.179 0.405
0.000 0.176 0.001
Sales/TA -0.349 -0.052 0.096 0.498
0.007 0.696 0.468 0.000
ROCE -0.554 0.075 0.316 0.968 0.613
0.000 0.571 0.015 0.000 0.000
E/CL -0.301 0.182 0.656 0.124 -0.259 0.001
0.021 0.167 0.000 0.350 0.048 0.995
TNW/TL -0.455 0.270 0.854 0.343 -0.055 0.223 0.857
0.000 0.039 0.000 0.008 0.682 0.089 0.000
IC -0.001 0.241 0.067 -0.325 -0.370 -0.486 0.177
0.991 0.066 0.614 0.012 0.004 0.000 0.179
CFO/LTD -0.309 -0.082 0.340 0.712 0.501 0.793 0.079
0.017 0.535 0.008 0.000 0.000 0.000 0.553
CFO/TD -0.297 0.141 0.425 0.635 0.308 0.607 0.213
0.022 0.286 0.001 0.000 0.018 0.000 0.105
RONW 0.173 -0.052 0.136 -0.180 0.089 -0.161 0.011
0.189 0.697 0.306 0.173 0.501 0.223 0.931
OI/Sales -0.457 0.150 0.248 0.620 -0.117 0.488 0.333
0.000 0.258 0.058 0.000 0.376 0.000 0.010
C/LTD -0.198 0.569 0.445 0.290 0.003 0.173 0.295
0.133 0.000 0.000 0.026 0.985 0.189 0.023
C+STD/TD -0.200 0.476 0.434 0.324 0.037 0.215 0.273
0.129 0.000 0.001 0.012 0.778 0.102 0.037
E/L -0.423 0.282 0.841 0.304 -0.080 0.188 0.859
0.001 0.031 0.000 0.019 0.549 0.154 0.000
CF/TA 0.014 0.270 0.015 0.327 -0.002 0.330 0.106
0.916 0.038 0.913 0.011 0.986 0.011 0.425
CF/TD -0.038 0.188 0.106 0.129 0.019 0.096 0.102
0.775 0.155 0.426 0.332 0.887 0.471 0.444
D/E 0.591 -0.202 -0.678 -0.283 -0.272 -0.256 -0.290
0.000 0.125 0.000 0.030 0.037 0.050 0.026
I/AD 0.087 0.364 0.149 -0.102 -0.116 -0.176 0.011
0.513 0.005 0.259 0.442 0.381 0.182 0.936
I/EBITDA 0.084 -0.095 -0.114 -0.106 -0.146 -0.079 -0.015
0.525 0.473 0.390 0.424 0.271 0.551 0.910
LTD/TA 0.666 -0.063 -0.765 -0.458 -0.451 -0.476 -0.258
0.000 0.636 0.000 0.000 0.000 0.000 0.048

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 Correlation Matrix: CRISIL18 and Financial Ratios, Part II
Financial Ratio TNW/TL IC CFO/LTD CFO/TD RONW OI/Sales C/LTD
IC 0.160
0.227
CFO/LTD 0.302 -0.737
0.020 0.000
CFO/TD 0.492 -0.226 0.783
0.000 0.085 0.000
RONW 0.009 -0.015 -0.006 -0.019
0.946 0.912 0.967 0.885
OI/Sales 0.382 0.104 0.191 0.275 -0.513
0.003 0.435 0.148 0.035 0.000
C/LTD 0.604 0.257 0.172 0.528 0.005 0.198
0.000 0.049 0.193 0.000 0.969 0.132
C+STD/TD 0.598 0.226 0.246 0.623 -0.011 0.207 0.981
0.000 0.085 0.060 0.000 0.934 0.116 0.000
E/L 0.992 0.166 0.296 0.514 0.024 0.323 0.618
0.000 0.209 0.023 0.000 0.859 0.013 0.000
CF/TA 0.107 -0.124 0.267 0.243 0.008 0.144 0.273
0.420 0.349 0.041 0.064 0.953 0.277 0.037
CF/TD 0.229 -0.022 0.058 0.057 0.017 0.070 0.628
0.082 0.867 0.661 0.670 0.896 0.597 0.000
D/E -0.417 0.013 -0.243 -0.233 -0.136 0.014 -0.197
0.001 0.924 0.063 0.076 0.304 0.916 0.135
I/AD 0.232 0.282 -0.212 -0.053 0.136 -0.067 0.651
0.077 0.030 0.106 0.693 0.304 0.616 0.000
I/EBITDA -0.111 0.022 -0.115 -0.109 0.031 -0.005 -0.101
0.404 0.871 0.386 0.410 0.815 0.970 0.445
LTD/TA -0.590 0.104 -0.499 -0.458 -0.070 -0.107 -0.315
0.000 0.435 0.000 0.000 0.596 0.419 0.015

Correlation Matrix: CRISIL18 and Financial Ratios, Part III

Financial Ratio C+STD/TD E/L CF/TA CF/TD D/E I/AD I/EBITDA
E/L 0.617
0.000

CF/TA 0.251 0.095

0.055 0.476

CF/TD 0.600 0.216 0.372

0.000 0.100 0.004

D/E -0.191 -0.403 0.037 -0.035

0.147 0.002 0.779 0.792

I/AD 0.600 0.218 0.151 0.676 -0.035

0.000 0.097 0.252 0.000 0.795

I/EBITDA -0.105 -0.095 -0.039 -0.024 0.167 -0.065

0.428 0.475 0.772 0.857 0.205 0.623

LTD/TA -0.341 -0.574 0.028 -0.053 0.645 -0.105 0.330

0.008 0.000 0.833 0.688 0.000 0.428 0.011

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Appendix 2: ICRM8 and ICRM18 Calculations
Three-Year Average of ICRM8 ICRM18
ICRM ICRM8 ICRM8 ICRM18 ICRM18
Company Name LTD/TA TNW/TL OI/Sales I/EBITDA Value Standardized Letter Standardized Letter
Ahmedabad Electricity Company Limited 0.083 0.920 0.048 0.213 0.672 1 AAA 1 AAA
Ashok Leyland Limited 0.181 0.691 0.084 0.456 0.138 3 A 3 AA
Amforge Industries Limited 0.366 0.154 -0.010 -0.771 -1.763 8 D 18 D
Apollo Hospitals Enterprise Limited 0.273 1.119 0.159 0.331 0.674 1 AAA 1 AAA
Asian Paints (India) Limited 0.132 0.841 0.135 0.108 0.736 1 AAA 1 AAA
Apollo Tyres Limited 0.203 0.567 0.086 0.417 0.032 3 A 3 AA
Aarti Industries Limited 0.411 0.614 0.127 0.291 0.038 3 A 3 AA
Atul Limited 0.371 0.459 0.055 0.887 -0.744 5 BB 11 BB+
Basf India Limited 0.178 1.187 0.115 0.186 0.938 1 AAA 1 AAA
Bharat Gears Limited 0.363 0.370 -0.020 -0.780 -1.572 8 D 18 D
Bharat Petroleum Corporation Limited 0.239 0.379 0.031 0.175 -0.005 3 A 4 AA-
Cadila Healthcare Limited 0.177 1.986 0.140 0.240 1.710 1 AAA 1 AAA
Century Enka Limited 0.168 1.553 0.082 0.193 1.274 1 AAA 1 AAA
Chambal Fertilisers & Chemicals Limited 0.411 0.419 0.193 0.423 -0.222 4 BBB 6 A
Colour-Chem Limited 0.108 1.089 0.036 0.304 0.713 1 AAA 1 AAA
Coromandel Fertilisers Limited 0.207 0.809 0.135 0.203 0.535 2 AA 2 AA+
Carborundum Universal Limited 0.149 0.982 0.156 0.260 0.729 1 AAA 1 AAA
Dabur India Limited 0.164 0.790 0.091 0.265 0.451 2 AA 2 AA+
Dcm Shriram Consolidated Limited 0.463 0.443 0.086 0.482 -0.416 4 BBB 8 BBB+
E.I.D. Parry (India) Limited 0.324 0.565 0.079 0.458 -0.139 3 A 5 A+
Electrosteel Castings Limited 0.253 1.018 0.223 0.161 0.828 1 AAA 1 AAA
Excel Industries Limited 0.243 0.527 0.050 0.882 -0.549 5 BB 9 BBB
Flex Industries Limited 0.683 0.256 0.068 0.639 -0.998 6 B 13 BB-
Finolex Cables Limited 0.100 2.335 0.138 0.207 2.166 1 AAA 1 AAA
Finolex Industries Limited 0.118 0.980 0.181 0.261 0.782 1 AAA 1 AAA
Gabriel India Limited 0.365 0.365 0.092 0.584 -0.491 4 BBB 8 BBB+
Great Eastern Shipping Company Limited 0.386 0.985 0.168 0.168 0.598 2 AA 2 AA+
Glenmark Pharmaceuticals Limited 0.195 2.635 0.151 0.209 2.382 1 AAA 1 AAA
Garware Polyester Limited 0.619 0.012 0.085 1.284 -1.807 8 D 18 D
Hero Honda Motors Limited 0.030 0.962 0.126 0.007 1.052 1 AAA 1 AAA
Hindalco Industries Limited 0.118 4.752 0.357 0.064 4.926 1 AAA 1 AAA
Hindustan Organic Chemicals Limited 0.431 0.364 -0.121 -0.610 -1.407 8 D 18 D
Hindustan Petroleum Corporation Limited 0.075 0.730 0.034 0.164 0.525 2 AA 2 AA+
India Glycols Limited 0.349 0.860 0.155 0.293 0.374 2 AA 2 AA+
Boc India Limited 0.357 0.822 0.016 0.476 0.005 3 A 3 AA
Indian Petrochemicals Corporation Limited 0.324 0.504 0.113 0.514 -0.222 4 BBB 6 A
Jindal Vijayanagar Steel Limited 0.647 0.084 0.067 1.460 -1.957 8 D 18 D
Jain Irrigation Systems Limited 0.548 0.091 0.022 2.081 -2.517 8 D 18 D
Jindal Iron & Steel Company Limited 0.469 0.278 -0.020 3.127 -3.337 8 D 18 D
Larsen & Toubro Limited 0.340 0.440 0.078 0.515 -0.337 4 BBB 7 A-
Max India Limited 0.144 2.017 -0.224 0.734 0.914 1 AAA 1 AAA
Madras Cements Limited 0.517 0.435 0.193 0.403 -0.291 4 BBB 6 A
Mahindra & Mahindra Limited 0.288 0.733 0.070 0.390 0.126 3 A 3 AA
Mahavir Spinning Mills Limited 0.383 0.708 0.132 0.376 0.081 3 A 3 AA
Mukand Limited 0.553 0.248 0.079 2.502 -2.728 8 D 18 D
National Aluminium Company Limited 0.178 2.014 0.296 0.101 2.031 1 AAA 1 AAA
Raymond Limited 0.297 0.929 0.070 0.518 0.185 3 A 3 AA
Rpg Transmission Limited 0.288 0.181 -0.075 -3.866 -7.915 8 D 18 D
Sudarshan Chemical Industries Limited 0.313 0.554 0.052 0.383 -0.089 3 A 4 AA-
Sterlite Industries (India) Limited 0.313 0.510 0.115 0.325 -0.014 3 A 4 AA-
Sun Pharmaceutical Industries Limited 0.035 3.324 0.240 0.056 3.473 1 AAA 1 AAA
Tube Investments Of India Limited 0.135 0.905 0.063 0.212 0.621 1 AAA 1 AAA
Tata Iron & Steel Company Limited 0.365 0.409 0.139 0.293 -0.110 3 A 5 A+
Thirumalai Chemicals Limited 0.210 0.448 0.101 0.615 -0.275 4 BBB 6 A
Tata Power Company Limited 0.353 0.764 0.167 0.327 0.251 3 A 3 AA
Tata Chemicals Limited 0.224 0.973 0.168 0.447 0.471 2 AA 2 AA+
Tata Finance Limited 0.500 0.057 0.379 0.414 -0.478 4 BBB 8 BBB+
Vardhman Spinning & General Mills Limited 0.436 0.462 0.091 0.477 -0.360 4 BBB 7 A-
Vst Industries Limited 0.263 0.561 0.127 0.248 0.176 3 A 3 AA

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