India Inc might be sitting on a multi-billion-dollar debt time bomb, with several big companies having large foreign exchange loans staring at a depleted September quarter.
The sharp depreciation of the rupee against the dollar will force companies to revalue such loans and provide for mark-to-market (MTM) losses (marking down assets to current values) in their quarterly results.
Companies with huge forex liability include some of the biggest names in India. Forex loans as a percentage of total debt are as high as 52 per cent for Reliance Communications, Indian Oil (32 per cent), Bharat Petroleum (42 per cent), JSW Steel (42 per cent), Bhushan Steel (30 per cent), SAIL (26 per cent), and NTPC (18 per cent).
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Several others have higher forex liability: Chambal Fertilsers (81 per cent), Aban Offshore (63 per cent), Coal India (88 per cent), Lupin Laboratories (90 per cent). Companies take forex loans to take advantage of lower rates.
If they choose not to cover their interest or forex risk, they can borrow at 4-5 per cent against a rupee cost of 10-12 per cent.
It would be difficult to ascertain if companies have hedged their forex liability. A lot of these will get reflected in the MTM losses they declare in the quarterly results.
With the rupee depreciating sharply in September, many have been caught unawares. “The view companies took on the rupee has backfired. They had taken a view that the rupee would remain stable at Rs 44-45 (to a dollar) levels, as the inflows into the Indian market were expected to continue,” said Puskar Bagga, senior vice-president with forex consultant Mecklai Financial.
Companies with long-term loans are, however, not worried. Nitin Johri, CFO, Bhushan Steel, said most of his loans were 7-8-year loans.
Not all companies with forex liability are going to provide for MTM losses. “If these are project loans and the projects are under implementation, you don’t need to provide MTM losses on these, according to the accounting norms,” said Johri.“But, if these are short-term loans of six months, you have to consider hedging.”
Around 10 per cent of Johri’s loans are short-term in the total forex debt of Rs 4,938 crore. While companies keep the interest and forex risks open, covering these would make the loans as expensive as rupee loans from Indian banks. “If you cover them, a fully-hedged forex loan will cost the same as a rupee loan,” Johri said.
“The widespread view on the rupee was that it would not weaken, so people thought they could keep their exposures open. The rupee was also moving in a narrow range (Rs 44-Rs 46 to a dollar) for a long time. The expectation was that a lot of money would flow into India and the rupee would strengthen,” said Bagga.
The forward premium was also very high and had gone up to six per cent a year ago. The cost of hedging would have been Rs 3.5 a dollar to hedge for one year. The rupee was stable and everyone felt there was no need to hedge for the long term.
Today, both exporters and importers find themselves in a dilemma. Most exporters have sold (their receivables forward) at the Rs 47-48 level. With the rupee quoting at Rs 49 (spot), banks are asking exporters to cough up the MTM losses (exporters have not converted their dollars; banks fear a loss if exporters are not able to deliver the dollars).
Similarly, consider an importer who has booked supplies at Rs 45. The supplier will not be affected as he will bill the importer in dollars, but the importer has to shell out additional rupees for every dollar, because the rupee has depreciated since then to Rs 49.
Under the circumstances, experts said, companies should stick to a risk management policy, rather than trying to beat the market. Having burnt their fingers, many would take fewer risks and will be conservative in their forex strategy. But many big companies will continue to keep their interest and forex risks open to keep interest costs lower.
