 "Historic fall in rupee impacts OMCs most")
Fitch Ratings has said that the depreciation of the Indian rupee has varying levels of implications for rated energy & utilities companies in India, but their ratings are not immediately affected.
The risks to stand alone financial profiles are highest for state-controlled petroleum marketing companies among the Indian energy sector issuers currently rated by Fitch.
The Indian rupee has depreciated by over 25% versus the US dollar since April 1.
The rated oil & gas companies have a significant proportion of foreign currency (FC)-denominated debt; however, they benefit from varying degrees of natural hedges present in their operations.
Utility companies have a much lower proportion of FC debt, and at the same time have the ability to pass on foreign exchange fluctuations as part of their tariff-setting mechanisms, which provides them with greater protection against the depreciation of the rupee.
The majority-state owned oil refining and marketing companies - Indian Oil Corporation Ltd (IOC, BBB-/Stable) and Bharat Petroleum Corporation Ltd (BPCL, BBB-/Stable) - had over 50% of their total debt in foreign currencies at FYE13.
However, the computation of the subsidy amount from the state to cover under-recoveries arising from selling certain fuels below market prices is based on US dollar terms. Because their refining margins are also linked to regional refining margins denominated in US dollar, the profitability of the refining operations will benefit from the rupee rout.
Regular increases in the price of diesel have reduced the under-recoveries, and hence the subsidy requirement; however, the rupee depreciation will reverse this trend.
While further price increases for diesel are being considered to reduce the subsidy requirement, the quantum of such price increases remains challenged by pressures on consumer inflation and political dynamics in India.
Both IOC and BPCL have been almost fully compensated for their under-recoveries in recent years by the direct subsidies from the state as well as those from state-controlled upstream companies.
However, delays in receipt of state subsidies at a time of a depreciating rupee could lead to higher working capital requirements, debt and interest costs for state-owned downstream operators. This can be further exacerbated if the downstream entities are expected to bear a share of the under-recoveries.
However, Fitch currently believes these entities will have sufficient access to funding sources, primarily the domestic banking system to manage their liquidity requirements given their strong state linkages. The ratings of IOC and BPCL are equalised with that of the sovereign (BBB-/Stable).
Given the pressures on federal finances, is it also possible for the state-linked upstream companies, whose cash generation is unlikely to be negatively affected by the rupee depreciation, to be required to increase their contribution towards downstream fuel subsidies.
Within the oil and gas portfolio, GAIL (India) Ltd (GAIL, BBB-/Stable) had the lowest proportion (around 30%) of FC debt at FYE13, which it has partially hedged with interest rate swaps and forward currency swaps. A majority portion of the hedging was done in the past five months.
Fitch does not expect GAIL's operating cash flows to be impacted significantly due to the cost pass-through pricing mechanism. GAIL too, has sufficient rating headroom, with its standalone rating being constrained by the sovereign.
Reliance Industries Ltd (RIL; BBB-/Stable, BBB/Positive) had a significant proportion (92%) of its FYE13 debt in foreign currency. However, RIL has a natural hedge, with both its raw materials as well as final products priced in US dollar. At FY13E, RIL had also hedged its currency and interest rate exposures through interest rate swaps (INR 324 bn), currency swaps (INR 33 bn), options (INR 23 bn) and forward contracts (INR 894 bn).
The hedging covers the company's debt, imports and its exports. In FY14, RIL has to repay $2 bn of long-term FC debt. It recently completed a $1.75 bn bond issue of which $1.2 bn will be used to refinance this debt.
Of the electricity utilities, NTPC Ltd (BBB-/Stable) and Power Grid Corporation of India Ltd (PGCIL, BBB-/Stable) had around 30% of their FY13 (year-end March) debt in foreign currency, while NHPC Ltd's (BBB-/Stable) share was 11%. None of these entities have hedged their foreign currency exposures.
The tariff mechanism allows for foreign exchange variations, which will allow them to pass on the foreign currency impact to the customers limiting the overall financial impact from the depreciation of the rupee.
All three ratings have sufficient headroom, with NTPC's and PGCIL's standalone ratings being constrained by that of the sovereign while NHPC's standalone is at the same level as the sovereign at 'BBB-'.
As the ratings of the state-linked entities are either equalised, at-the same level or constrained by that of the state, any negative rating action on India will have similar implications on their ratings.
RIL's Foreign Currency Issuer Default Rating of BBB-/Stable, which is currently constrained by the Country Ceiling of India, can also be negatively affected if the Country Ceiling is downgraded.
The risks to stand alone financial profiles are highest for state-controlled petroleum marketing companies among the Indian energy sector issuers currently rated by Fitch.
The Indian rupee has depreciated by over 25% versus the US dollar since April 1.
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Fitch expects limited negative credit implications for most of the rated issuers due to natural or financial hedges or, in the case of utilities, tariff mechanisms that allow for exchange rate fluctuations.
The rated oil & gas companies have a significant proportion of foreign currency (FC)-denominated debt; however, they benefit from varying degrees of natural hedges present in their operations.
Utility companies have a much lower proportion of FC debt, and at the same time have the ability to pass on foreign exchange fluctuations as part of their tariff-setting mechanisms, which provides them with greater protection against the depreciation of the rupee.
The majority-state owned oil refining and marketing companies - Indian Oil Corporation Ltd (IOC, BBB-/Stable) and Bharat Petroleum Corporation Ltd (BPCL, BBB-/Stable) - had over 50% of their total debt in foreign currencies at FYE13.
However, the computation of the subsidy amount from the state to cover under-recoveries arising from selling certain fuels below market prices is based on US dollar terms. Because their refining margins are also linked to regional refining margins denominated in US dollar, the profitability of the refining operations will benefit from the rupee rout.
Regular increases in the price of diesel have reduced the under-recoveries, and hence the subsidy requirement; however, the rupee depreciation will reverse this trend.
While further price increases for diesel are being considered to reduce the subsidy requirement, the quantum of such price increases remains challenged by pressures on consumer inflation and political dynamics in India.
Both IOC and BPCL have been almost fully compensated for their under-recoveries in recent years by the direct subsidies from the state as well as those from state-controlled upstream companies.
However, delays in receipt of state subsidies at a time of a depreciating rupee could lead to higher working capital requirements, debt and interest costs for state-owned downstream operators. This can be further exacerbated if the downstream entities are expected to bear a share of the under-recoveries.
However, Fitch currently believes these entities will have sufficient access to funding sources, primarily the domestic banking system to manage their liquidity requirements given their strong state linkages. The ratings of IOC and BPCL are equalised with that of the sovereign (BBB-/Stable).
Given the pressures on federal finances, is it also possible for the state-linked upstream companies, whose cash generation is unlikely to be negatively affected by the rupee depreciation, to be required to increase their contribution towards downstream fuel subsidies.
Within the oil and gas portfolio, GAIL (India) Ltd (GAIL, BBB-/Stable) had the lowest proportion (around 30%) of FC debt at FYE13, which it has partially hedged with interest rate swaps and forward currency swaps. A majority portion of the hedging was done in the past five months.
Fitch does not expect GAIL's operating cash flows to be impacted significantly due to the cost pass-through pricing mechanism. GAIL too, has sufficient rating headroom, with its standalone rating being constrained by the sovereign.
Reliance Industries Ltd (RIL; BBB-/Stable, BBB/Positive) had a significant proportion (92%) of its FYE13 debt in foreign currency. However, RIL has a natural hedge, with both its raw materials as well as final products priced in US dollar. At FY13E, RIL had also hedged its currency and interest rate exposures through interest rate swaps (INR 324 bn), currency swaps (INR 33 bn), options (INR 23 bn) and forward contracts (INR 894 bn).
The hedging covers the company's debt, imports and its exports. In FY14, RIL has to repay $2 bn of long-term FC debt. It recently completed a $1.75 bn bond issue of which $1.2 bn will be used to refinance this debt.
Of the electricity utilities, NTPC Ltd (BBB-/Stable) and Power Grid Corporation of India Ltd (PGCIL, BBB-/Stable) had around 30% of their FY13 (year-end March) debt in foreign currency, while NHPC Ltd's (BBB-/Stable) share was 11%. None of these entities have hedged their foreign currency exposures.
The tariff mechanism allows for foreign exchange variations, which will allow them to pass on the foreign currency impact to the customers limiting the overall financial impact from the depreciation of the rupee.
All three ratings have sufficient headroom, with NTPC's and PGCIL's standalone ratings being constrained by that of the sovereign while NHPC's standalone is at the same level as the sovereign at 'BBB-'.
As the ratings of the state-linked entities are either equalised, at-the same level or constrained by that of the state, any negative rating action on India will have similar implications on their ratings.
RIL's Foreign Currency Issuer Default Rating of BBB-/Stable, which is currently constrained by the Country Ceiling of India, can also be negatively affected if the Country Ceiling is downgraded.