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India Ratings & Research (Ind-Ra), in a new report, said that 225 of its 290 credit ratings on investment-grade corporates are unlikely to be impacted if the rupee sustains in the range of Rs 60 per dollar to Rs 65 per dollar. Another 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. However, Ind-Ra does not expect any of these issuers to default.
Indian corporates are currently more vulnerable to currency shocks than any time in recent history, given the current bout of sharp rupee depreciation and historically high currency volatility. The agency expects the next 12-18 months to be most challenging for Indian 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 the overwhelming majority of the agency’s investment-grade issuers are continuing to maintain their credit profile reflects Ind-Ra’s through-the-cycle credit rating methodology and global best practices”, said Rakesh Valecha, Senior Director & Head, Corporate Ratings.
“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”, he said.
Foreign currency debt residing within the agency’s investment grade issuers is also in safe hands. As many as 73 issuers have foreign currency debt. About 81% of the foreign currency debt belongs to 45 corporates, which have sufficient-to-comfortable rating headroom. However, 28 corporates (19% of foreign currency debt) may face an Outlook revision (to Negative) or negative rating pressure.
The benefits of a weak rupee to the operating margin of export-oriented segments, including IT, pharmaceuticals and textiles, are more limited than may normally be expected. The report provides empirical analysis on publicly listed corporates in support of this argument. The benefits are usually restricted since customers enter into price renegotiations. Additionally, hedging transactions entered into by established players limit the potential upsides (as well as downside) in case of rupee depreciation (or appreciation).
Sectors such as chemicals, paper, auto ancillaries, power and steel are most affected from rupee depreciation. Among these sectors, mid-sized companies with exposure to forex risk but limited expertise or intention to hedge may be most adversely affected, the report said.
