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Dilemma: Industry vs company

N.S. Vageesh

IT is the coffee versus toffee kind of debate! The dilemma which every bank officer or rating analyst goes through while rating a company or evaluating a credit proposal! Which should be given more weightage -- a company's intrinsic strengths or the pro spects of the industry to which it belongs? Hard to answer. Some would say industry and some would say company! And both claim that their viewpoint has been vindicated.

This dimension came through recently through two separate developments. Two months ago, Mr P.H. Ravikumar, Senior Executive Vice-President of ICICI Bank, while explaining the improvement in his bank's asset quality said that the bank was laying more emph asis on industry prospects of its borrowers compared to its earlier focus on the quality of the company management. He said, ``Experience had proved that even the best run company in a particular industry could not insulate itself from the pressures tha t it was subjected too.''

This shift in focus, apart from other changes in strategy, paid rich dividends in terms of asset quality for the bank which saw borrowers with a rating of `A' grade and above increasing from around 51 per cent of the portfolio in March 2000 to around 80 per cent of advances in September 2000.

A week ago, Mr R. Ravimohan, Managing Director of Crisil, was asked by a financial daily to explain the vast improvement in the quality of debt instruments in the first six months of the current fiscal. The number of upgrades per 100 downgrades had risen to 154 during the six months ended September 2000, compared to an eight year average of 41. His explanation for this development: ``Some of the companies have consolidated well. Secondly, we have changed our focus from industry to the company itself...' '

Granted, the perspectives of a rating agency and a bank may not necessarily be the same. That explains the differences in approaches. However, at the core, both are concerned with asset quality. And we have here an interesting case of different viewpoint s leading to upgrades in asset quality, if the figures are anything to go by.

A senior observer of the banking scene pointed out, ``Every industry will go through troughs and peaks. Sometimes these troughs may be deeper and end in a disaster -- because of changes wrought by technology, for instance. The challenge for the company m anagement is in recognising this quickly and getting out if necessary. I would, therefore, think that company focus is a shade more important! At the same time, banks can't put all their eggs into one basket. So for portfolio management and prudential ex posure norms,banks must look at industry prospects too. Ideally they should be able to change the exposure with changes in the industry environment.''

So, if you were a finance professional, would you be able to come to a conclusion? Company or industry? The debate continues...