 "Half of India Inc's $200-bn forex debt is unhedged: CRISIL")
A falling rupee is a $100-billion worry for corporate India. That's the amount of Indian companies’ unhedged foreign currency debt.
According to a study by rating agency CRISIL, of the $200 billion foreign currency debt (as on March 31) of Indian companies, 45 per cent is short-term. Even the blue-chip Nifty companies (excluding those in the banking and financial services space) have 40 per cent of their debt in foreign currency.
These companies, which borrowed from abroad to take advantage of lower interest rates, will have to bear the burden of increased interest payments, marked-to-market losses and payment for rollover of hedged positions on their loans, according to a report by the research division of rating agency Crisil.
The rupee, which has depreciated around 11 per cent against the dollar since May, is the worst performing currency in Asia. The weakening rupee increases the debt burden of companies that have raised foreign currency loans.
Mukesh Agarwal, president, CRISIL Research, said a significant portion remained unprotected from the volatility. “…only half of their forex exposure is hedged. Persistent weakness in the rupee and heightened volatility have reduced the benefits of borrowing overseas,” he said in a statement.
The recent fall in the currency is due to a combination of both domestic and global factors. While the country’s high current account deficit is weighing on the rupee, concerns that the US Federal Reserve will slow the pace of its asset purchase programme have also made foreign institutional investors withdraw from emerging markets. Current account deficit for 2012-13 hit a record high of 4.8 per cent of gross domestic product, much higher than the Reserve Bank of India's tolerance zone of 2.5 per cent.
Sonam Udasi, head of research at IDBI Capital, said smaller companies were more likely to be hit by the rupee fall. “Most companies have enough access to banking leverage. It’s only the small companies which could face liquidity issues,” he said.
Companies that do not have foreign earnings, which could act as a natural hedge against the falling currency, will be badly hit, according to Crisil. Even exporters may not benefit much as clients will expect lower prices on account of the currency depreciation.
Prasad Koparkar, senior director, CRISIL Research, said export-oriented companies might not gain a great deal. “Our view is corroborated by the modest performance of export-oriented industries in 2012-13, a year in which the rupee depreciated by 14 per cent against the dollar on a year-on-year basis. Around 180 listed export-oriented companies reported a marginal one-two per cent growth in revenues in dollar terms and 60-basis-point rise in Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins in 2012-13, despite a weak currency,” he said in the release.
Crisil expects the rupee to strengthen but still remain weaker by five-eight per cent on average for the current financial year, compared to FY13.
The rupee’s depreciation will result in higher input costs for companies across sectors, even as demand remains weak, noted the report.
Sectors hit hard by the rupee’s fall are automobiles, auto components, airlines, consumer durables, oil marketing and fertilisers, according to the rating agency. In the case of oil marketing companies, the under-recoveries could touch Rs.1.05 lakh crore for the current financial year.
The weakening of the rupee, however, is seen as a positive for the crude oil producing companies and pure play oil refiners as as their product prices and profitability, denominated in dollars, are determined by global demand-supply dynamics. As a result, it is expected that a weaker rupee will boost their earnings in rupee terms, according to the report.
For steel manufacturers, however, the depreciation of rupee is nuetral because while the landed cost of steel will also increase, but manufacturers won’t be able to increase domestic prices commensurately due to the subdued demand environment. "Moreover, coking coal costs would increase, which would keep margins of (steel) players under pressure," Crisil said.
According to a study by rating agency CRISIL, of the $200 billion foreign currency debt (as on March 31) of Indian companies, 45 per cent is short-term. Even the blue-chip Nifty companies (excluding those in the banking and financial services space) have 40 per cent of their debt in foreign currency.
These companies, which borrowed from abroad to take advantage of lower interest rates, will have to bear the burden of increased interest payments, marked-to-market losses and payment for rollover of hedged positions on their loans, according to a report by the research division of rating agency Crisil.
The rupee, which has depreciated around 11 per cent against the dollar since May, is the worst performing currency in Asia. The weakening rupee increases the debt burden of companies that have raised foreign currency loans.
Mukesh Agarwal, president, CRISIL Research, said a significant portion remained unprotected from the volatility. “…only half of their forex exposure is hedged. Persistent weakness in the rupee and heightened volatility have reduced the benefits of borrowing overseas,” he said in a statement.
The recent fall in the currency is due to a combination of both domestic and global factors. While the country’s high current account deficit is weighing on the rupee, concerns that the US Federal Reserve will slow the pace of its asset purchase programme have also made foreign institutional investors withdraw from emerging markets. Current account deficit for 2012-13 hit a record high of 4.8 per cent of gross domestic product, much higher than the Reserve Bank of India's tolerance zone of 2.5 per cent.
Sonam Udasi, head of research at IDBI Capital, said smaller companies were more likely to be hit by the rupee fall. “Most companies have enough access to banking leverage. It’s only the small companies which could face liquidity issues,” he said.
Companies that do not have foreign earnings, which could act as a natural hedge against the falling currency, will be badly hit, according to Crisil. Even exporters may not benefit much as clients will expect lower prices on account of the currency depreciation.
Prasad Koparkar, senior director, CRISIL Research, said export-oriented companies might not gain a great deal. “Our view is corroborated by the modest performance of export-oriented industries in 2012-13, a year in which the rupee depreciated by 14 per cent against the dollar on a year-on-year basis. Around 180 listed export-oriented companies reported a marginal one-two per cent growth in revenues in dollar terms and 60-basis-point rise in Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins in 2012-13, despite a weak currency,” he said in the release.
Crisil expects the rupee to strengthen but still remain weaker by five-eight per cent on average for the current financial year, compared to FY13.
The rupee’s depreciation will result in higher input costs for companies across sectors, even as demand remains weak, noted the report.
Sectors hit hard by the rupee’s fall are automobiles, auto components, airlines, consumer durables, oil marketing and fertilisers, according to the rating agency. In the case of oil marketing companies, the under-recoveries could touch Rs.1.05 lakh crore for the current financial year.
The weakening of the rupee, however, is seen as a positive for the crude oil producing companies and pure play oil refiners as as their product prices and profitability, denominated in dollars, are determined by global demand-supply dynamics. As a result, it is expected that a weaker rupee will boost their earnings in rupee terms, according to the report.
For steel manufacturers, however, the depreciation of rupee is nuetral because while the landed cost of steel will also increase, but manufacturers won’t be able to increase domestic prices commensurately due to the subdued demand environment. "Moreover, coking coal costs would increase, which would keep margins of (steel) players under pressure," Crisil said.