Large firms can take another 15% rupee drop due to natural hedge: Moody's

Analysing 22 rated Indian firms, Moody's found nearly half of them had dollar revenues or contracts priced in US dollars that protect the local earning

Indian companies that generate revenues in rupee but rely heavily on foreign debt are relatively well protected against rupee depreciation, even as the 3 per cent year-to-date depreciation in the rupee would be temporarily credit negative for them, rating agency Moody’s said on Thursday.  

"Most companies have protections to limit the effect of currency fluctuations. These include natural hedges, some US dollar revenue and financial hedges, or combination of these factors, to help limit the adverse effect on cash flow and leverage, even under a more severe deprecation scenario,” Moody’s said.  

Therefore, the current rating level could be protected even when the rupee depreciates a further 15 per cent against the dollar. The rupee has depreciated 14.4 per cent already since 2018. On January 1, 2018, it was at 63.68 a dollar, while it closed at 74.36 a dollar on Wednesday. Year to date, it has depreciated 3 per cent. The rupee has strengthened on Thursday as the stock indices gained.   

According to Moody’s "refinancing risk associated with US dollar debt over the next 18 months also appears manageable, as most companies are well known in the markets as repeat issuers and others are government-owned or government-linked entities with good access to the capital markets.” 

Analysing 22 rated Indian companies, Moody’s found nearly half of them benefitting from natural hedges, meaning companies generate revenue in US dollars or have contracts priced in US dollars that protect the local earning from any exchange rate fluctuation. 

This grouping includes nine companies primarily across the IT service-related and commodity sectors. For example, IT service-related companies including Genpact (Baa3 stable) and Marble II Pte. (Ba2 stable) generate the majority of their revenue in US dollars while their cost base is largely rupee denominated, meaning they could actually see some cash flow benefit from the currency depreciation.  

Commodities producer Vedanta Resources (B2 negative) also benefits from a natural hedge as its revenue is largely pegged to the US dollar, with the selling prices of its products linked with global commodity prices, Moody’s said. While the company’s 60 per cent debt is denominated in US dollars, and has a persistent refinancing requirement over the next 12-18 months, the risks have already been captured in the rating. 

Six government-owned or government-linked oil and gas companies also benefit from a natural hedge as their earnings are linked to the US dollar because crude oil, natural gas, petroleum products and petrochemicals are all sold at US dollar-linked prices in India. A depreciating rupee will not have a significant impact on the debt-servicing capabilities of HPCL-Mittal Energy (Ba2 negative), Oil and Natural Gas Corp (Baa3 negative) and Oil India (Baa3 negative).  

"But for refining and marketing companies including Bharat Petroleum Corporation (Baa3 negative), Hindustan Petroleum Corporation (Baa3 negative) and Indian Oil Corporation (Baa3 negative), the natural hedge may be less effective,” it said. 

“With a depreciating rupee, refining margins will rise in rupee terms implying higher selling prices. Although the companies have been able to pass on the price increase to the ultimate consumer in the recent past, the risk of margin dilution cannot be ruled out with a sustained depreciation of the rupee,” Moody’s observed. 

Indian conglomerate Reliance Industries (Baa2 negative) also has natural hedges which along with a net cash position results in manageable exposure to risks associated with rupee depreciation.  

Companies such as Tata Chemicals (Ba1 stable), Tata Motors (TML, B1 negative) also has US dollar borrowings, but serviced directly by their overseas subsidiaries. 

Automotive supplier Motherson Sumi Systems (Ba1 stable) US dollar borrowings are held at its European subsidiary, Samvardhana Motherson Automotive Group (SMRP) and serviced out of the cash flow of that business and, therefore, is not impacted by the rupee weakening.  

Chemicals producer UPL Corporation (Baa3 stable) almost 60 per cent of the consolidated revenue is in US dollars or is pegged to the dollar and euro. 

Companies such as Tata Steel (Ba2 stable) uses financial hedges to help minimize its exposure to foreign-exchange fluctuations. Moody’s said the company’s large cash balance combined with funds from its equity raise in March 2021 should be sufficient to meet upcoming debt repayments and other cash needs for at least the next 12-18 months.  

Ultratech Cement (Baa3 negative) derives around 96 per cent of its revenue from India, and had around $360 million of US dollar debt as of December 2020, and in February 2021 raised $400 million from the issuance of a 10-year bond.  

“The company however uses financial hedges to manage its foreign-currency risk exposure on interest and principal payments.” 

Similarly, Bharti Airtel (Ba1 stable) has around 25 per cent of debt denominated in US dollars, but a portion of it is serviced by its African subsidiaries. 

JSW Steel (Ba2 stable) has 58 per cent of its reported debt denominated in US dollars but generates around 25% of its revenue outside India. The company also uses financial hedges to manage foreign-currency risk exposure. And selling prices for steel in India closely follow regional steel prices denominated in US dollars. 

The effects of a further weakening of the rupee against the US dollar are manageable for Macrotech Developers (Caa1 positive) and Petronet LNG (Baa3 negative).  

“Finally, IT services companies Tata Consultancy Services (Baa1 negative) and Infosys (Baa1 negative), which are both debt free, should benefit from the weakening of the rupee because most of their revenue is in US dollars, but their costs are incurred in multiple currencies,” Moody’s said. 

Table: US dollar denominated bond maturities over the next 18 month

Company	Industry	Rating	USD Outstanding (in mn)	Coupon (%)	Maturity
Vedanta Resources	Metals and Mining	B2 – Negative	187	8.25	June 2021
Indian Oil Corp	Oil & Gas	Baa3 -- Negative	500	5.625

August 2021 Bharat Petroleum Oil & Gas  Baa3 -- Negative 500 4.375 January 2022 ONGC Oil & Gas  Baa3 -- Negative 400  2.875 January 2022

Reliance Industries 

Oil & Gas  Baa2 -- Negative 1,500  5.4 February 2022 Genpact  IT service related  Baa3 – Stable 350  3.7 February 2022 JSW Steel  Steel  Ba2 – Negative 500  5.25 February 2022 Marble II Pte.  IT service related  Ba2 – Stable 500  5.3 February 2022

Vedanta Resources 

Metals and Mining  B2 – Negative 1,000 

6.375

July 2022 Bharat Petroleum Oil & Gas Baa3 -- Negative 500

4.625

October 2022

Source: Moody's Investors Service

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2.875 Jan-22