No ratings impact on most cos if rupee falls to 65: India Ratings

Buy says 65 investment-grade issuers may face negative rating action if rupee remains in this range

As many as 225 of a total 290 corporates are unlikely to be impacted on the ratings front if rupee falls to 65 against the dollar, according to India Ratings.

Since the beginning of the fiscal, the rupee has lost over 12% and last Friday closed at all-time low of 61.10 to the dollar, as foreign funds continue to sell their positions in the country. Rupee hit intra-day record low of 61.21 on July 8.

Between May 22, when US Fed said it may stop bond buyback programme by the end of this year, and the week ending July 26, FIIs have pulled out a whopping Rs 63,460 crore from domestic debt and equities, as per Sebi data.

Credit ratings on 225 investment-grade corporates out of a total of 290 are unlikely to be impacted if at all rupee falls to 65 to the greenback, says the India Ratings report.

The report, however, said that "65 investment-grade issuers may face negative rating actions, such as an outlook revision or a rating downgrade, if the rupee remains in this range. But we do not expect any of these issuers to default."

Notably, the country is staring at a short-term forex loan repayment of $174 billion.

Admitting that domestic corporates are currently more vulnerable to currency shocks than any time in recent history, given the current bout of sharp rupee fall and a historically high currency volatility, the report says it expects next 12-18 months to be most challenging for the corporates.

"Issuers with investment-grade ratings are expected to timely service their debt even during a cyclical downturn as opposed to sub-investment grade issuers. The way majority of our investment-grade issuers are continuing to maintain their credit profile reflects our through-the-cycle credit rating methodology and global best practices," says India Ratings senior director and head for corporate ratings Rakesh Valecha.

"Typically, investment grades companies should not experience significant payment difficulties and sharp deterioration in credit profile at the onset of a stressful economic situation. On the contrary, debt servicing problem during a downturn is a characteristic of sub-investment grade issuers," Valecha says.

Noting that foreign currency debt residing within the investment grade issuers is also in safe hands, the report says as many as 73 issuers have foreign currency debt and 81% of this belongs to 45 corporates which have sufficient-to-comfortable rating headroom.

However, 28 corporates (19 per cent of foreign currency debt) may face an outlook revision (to negative) or negative rating pressure, India Ratings said.

Benefits of a weak rupee to operating margin of export oriented segments, including IT, pharma and textiles, are more limited than may normally be expected, says the report.

Sectors such as chemicals, paper, auto ancillaries, power and steel are most affected from the rupee fall. Among these, mid-sized companies with exposure to forex risk but limited expertise or intention to hedge may be most adversely affected, the report concludes.