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Corporate Rating Methodology

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Introduction

Capacity & Willingness to pay service financialobligations

Strong correlation between short-term & long-termratings

At least 3 years past data & future expectationsanalyzed

Peer comparison

Sensitivity analysis

Various risks taken into account Quantitative & qualitative analysis

Overlaps present

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Industry Risk

Analysis of industry fundamentals

Industry life cycle position

Competition (Local/ International) Capital or labor intensity

Cyclical or volatile nature

Barriers to entry

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Operating Environment

Social, Demographic, Regulatory &

Technological changes

Geographical diversification/ Capacity

utilization

Expansion/ Consolidation

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Management

Corporate strategy/ Direction

Risk tolerance (financial acquisitions/ internalexpansion)

Funding policies (mix of equity & debt)

Aggressive short-term or conservative long termpolicies in place

Ability & willingness of sponsors to provide financialsupport

Management quality & Track record Achievements of previously set targets & probability of

meeting future projections

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Corporate Governance

Effectiveness & independence of board/

conflicts of interest

Oversight on related party transactions

Monitoring of audit function

Reasonableness of executive/ director

remuneration Relative complexity of shareholding structure/

family ownerships

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Accounting

Rating does not include audit

Accounting policies review

Accuracy of financial data

Restatement to make data more comparable

Special emphasis on: Valuation principles

Consolidation principles

Inventory costing

Depreciation methods

Income recognition

Pension provisions

Treatment of goodwill, off-balance sheet items & amortization policies

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Cash Flows

Cash flows given more importance than equity based datadue to better reflection of current market prices

Cash flow measures of earnings, coverage & leverage

Significance of CFO rather than external financing

Availability of funds to pay back debt Other factors not directly affecting cash flows also

considered: Marking of assets to market

Impairment charges

Derivatives

Write down of inventory

Foreign currency movements

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Earnings

Earnings form basis of cash flows

Assessment of stability/ continuity of earnings

Non-operational one time inflows/ outflows Effect of non-cash provisions

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Capital Structure

Debt & equity mix based on industry

Companys reliance on external financing

Off-balance sheet debt (party owned companies &unconsolidated subsidiaries)

Receivable securitization if any Preferred stock issues/ conversion options

Adjustments for better comparison including: Asset values

Leased property

Contingencies

Treatment of goodwill

Provision of deferred taxes & off-balance sheet items

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Financial Flexibility

Latitude to meet debt service obligations &

manage stress

More conservative capitalization results in

better financial flexibility

Ability to redeploy assets & revise capex plans

Strength of banking relationships

Equity market access

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Project Risk Evaluation

Relative size of project undertaken in

comparison to company size

Projects business risk

Funding options available

Probability & contingency plans for:

Cost & time overruns Technology risk

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Financial Ratios

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Earning/ Profitability Ratios

Turnover growth

Gross margin

Operating margin

Pre-tax profit margin

Net profit margin Effective tax rate

Average interest rate

Pre-tax return on equity

Return on equity

Asset turnover Net profit margin

Financial leverage

Return on assets

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Coverage Ratios

Short term debt payback (years)

Total debt payback (years)

Net debt payback (years) Net debt / EBITDA

EBITDA net interest cover (times)

Net interest cover (times)

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Liquidity Ratios

Current ratio

Quick ratio

Average inventory days (days) Average trade debtors (days)

Gross cash cycle (days)

Average trade creditors (days) Net cash cycle (days)

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Financial Structure Ratios

Current debt/ total debt

Total debt/ equity

Net debt/ equity

Equity/ assets

Total debt/ Adjusted equity (net of rev.surplus)

Total liabilities/ equity

Total debt/ (total debt + equity)