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ASSIGNMENT 1 CREDIT RISK

IAPM

SUBMITTED BY SUBHASH 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
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 a
firm'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 Z score 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
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.


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 retail
properties.
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:

PARTICULAR VALUES PARTICULAR VALUES
WORKING
CAPITAL (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 1.58
SALES 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
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 to
be 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
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 and
large exposure to structurally weak infrastructure sector and some large
corporates. Its gross NPAs also rose from 2.12% to 3.66% in Q3 FY13.

PARTICULAR VALUES PARTICULAR VALUES
WORKING CAPITAL
(CA-CL)

1149623000
WC/TA 0.78
TOTAL ASSETS 1475593000 RE/TA 0.04
EBIT 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