Idea Cellular's billion-dollar debt worries analysts

Aditya Birla Group company Idea Cellular is sitting on un-hedged debt of about $1 billion and this could impact its earnings from 2016-17 if the rupee falls to 70/dollar, warn analysts.

As of March this year, the company’s total loans stood at about Rs 14,000 crore. Of this, about $1 billion (at Rs 62/dollar) was in foreign currency. Half the principal repayments of this foreign debt were hedged; the interest payments were un-hedged.

Morgan Stanley estimates five per cent movement if the rupee-dollar rate has an impact of about one per cent on Idea’s profits.

PAIN OF DEBT

• Aditya Birla Group company Idea Cellular is sitting on un-hedged debt of about $1 billion
• This could impact its earnings from 2016-17 if the rupee falls to 70/dollar, warn analysts
• Morgan Stanley estimates five per cent movement if the rupee-dollar rate has an impact of about one per cent on Idea’s profits
• Analysts say if the rupee continues to depreciate, Idea would be more vulnerable to currency shocks

When contacted, Akshaya Moondra, chief financial officer of Idea Cellular, said, “Our un-hedged foreign currency long-term loans stood at $657 million as on June 30. All the loan repayments due in the next 36 months are fully hedged. The $657-million un-hedged portion represents loan repayments due from 2016-17 to 2023-24.”

Analysts say if the rupee continues to depreciate, Idea would be more vulnerable to currency shocks. Since early this year, the rupee has depreciated about 20 per cent against dollar, putting the plans of many Indian companies at risk.

Idea’s dollar loan is due by 2016-17 and in the worst-case scenario (if the rupee weakens to 70/dollar), after 2016-17, the principal repayment would rise 17 per cent, says a Goldman Sachs analyst.

Recently, Idea converted its dollar-denominated floating rate to a rupee-denominated fixed rate by entering into two swaps for its principal repayments. The hedging was carried out in the Mumbai inter-bank forward offer rate market. Analysts say Idea may hedge the remaining un-hedged exposure (after 2016-17) in the coming years, when the cost of hedging falls. With the recent cover, Idea’s average cost of dollar loans has increased from 4.6 per cent to eight per cent, taking into account the hedging cost.

When contacted, a senior Aditya Birla Group official said due to the rupee’s fall against the dollar, the group had decided to cover every loan taken by group companies, including Idea. “Even in the case of Idea, the company is taking steps to take forward-cover on the loans so that it wouldn’t impact our future earnings… The group policy is not to keep any position open.”

Meanwhile, the Idea stock is faring well, closing on Friday at Rs 158.2, up 52 per cent since January this year. The company is planning to raise Rs 3,000 crore through a qualified institutional placement and an additional Rs 750 crore from one of its shareholders, Axiata.

According to a recent study by rating firm Ind-Ra, 223 of the top 290 Indian companies have exposure to foreign currency risks. Of the 223 companies, 94 (accounting for 74 per cent of debt) follow hedging practices, with different consistencies. Among the hedgers, 61, with both operational and financial foreign exchange exposures, hedge about 60 per cent of their respective exposures. For companies without any forward cover or exports, the risk of default is very high, warn analysts.