Ind-Ra: Nearly Half of Top 500 Listed Borrowers Vulnerable to Weak Rupee


The vulnerability of the top 500 listed corporate borrowers (ex-banking and financial services) to rupee depreciation remained high during FY14 despite a marginal improvement in sensitivity over previous years, says India Ratings and Research (Ind-Ra). 234 of the 500 largest, listed corporate borrowers have a negative sensitivity to rupee (INR) depreciation. If rupee depreciates by 1% (against the US dollar (USD)), it would shave off their absolute EBITDA by 0.19% (median). However, this is lower than the 0.28% (median) observed across 237 negatively sensitive corporates in FY13.

During FY13-FY14, the aggregated net foreign currency outflows (forex inflows minus forex outflows) of these 500 corporate borrowers grew at a slower rate than in the past (FY14: 6.9%, FY13: 7.9%). This was due to a decline in commodity prices and low industrial imports because of muted domestic industrial activity. The forex inflow growth rate (FY14: 10.7%, FY13: 13.7%), though off the highs of FY11 and FY12, was higher than the growth rate of forex outflow.

The agency would like to highlight that the oil and gas sector, despite being a heavy net importer, is lesser affected by rupee depreciation. Since the prices of end-products of upstream and midstream players are import price parity linked, corporates in this sector where regulatory intervention is limited would be in a much better position to pass on higher rupee costs.

The challenge to lenders remain that these 234 net importers account for 45% of FY14 consolidated debt (equivalent to INR12.9trn). These corporates also account for 37% of the total consolidated FY14 foreign currency debt (equivalent to INR1.5trn; often unhedged), making their balance sheet borrowings vulnerable to currency headwinds apart from causing deterioration in their operating profits in the event of sustained rupee depreciation. The agency estimates that the situation may not have meaningfully improved in FY15.

The impact of rupee depreciation on the credit profile of some of these borrowers may be aggravated because of their existing high leverage levels. According to FY14 data, the operating profit of 180 of the 234 net importers would have fallen by no more than 1% for 1% rupee depreciation. However, this group had median leverage of 6.4x (standalone), implying low tolerance to the sharp rupee depreciation of 5%-20% observed during FY12 and FY13. However, more worrisome are those 13 corporates whose EBIDTA would have reduced by 5% for every percent of rupee depreciation. A higher proportion of them belong to the fertiliser and other manufacturing sectors. There are nine corporates in the ‘-3 to -5’ sensitivity bucket which had median leverage of 10x (standalone FY14). These belong to the metals & mining, fertiliser, textile, sugar and gems & jewellery sectors. The debt servicing ability of these corporates is already stretched and sustained currency depreciation could push them into the stressed category.

Corporates whose foreign exchange positions are unhedged may find themselves in a strange dilemma. If these corporates choose to hedge their dollar borrowings, it may turn out to be costlier than cost of rupee borrowings due to the current high cost of hedging dollar liabilities (estimated at around 700bp USD-INR forward premiums). However, an unhedged sustained currency shock (rupee depreciation) can deteriorate their credit profiles further.

Fertiliser and consumer durables are the sectors with prominent negative sensitivity. 1% rupee depreciation would have reduced the absolute EBITDA of corporates in the fertiliser sector (highly import dependent) by 2% (median) in FY14 (FY13: negative 2.1%) and would have shaved off the absolute EBITDA of corporates in the consumer durable sector by 0.37% (median; negative 0.3%).

However, certain sections of borrowers are winners in the event of rupee depreciation as previously highlighted by Ind-Ra. The net exporting sectors IT and pharma are among the more efficient foreign currency earners and hence display a positive sensitivity to rupee depreciation. Rupee depreciation by 1% is likely to have improved the absolute EBITDA of IT corporates by 1.8% (median) in FY14 (FY13: 2%) and that of pharmaceutical corporates by 1.63% (median; 1.84%). The textile sector also showed a positive sensitivity of 0.7% (median) in FY14 (FY13: 1.2%).

Furthermore, Ind-Ra has identified the top 10 corporates most sensitive to rupee depreciation and rupee appreciation within the largest 500 corporate borrowers. Though the INR/USD rate has been less volatile than observed in the last 12 months, this study gives an insight to lenders and other investors on the direction and size of the impact of a change in rupee rate on the operating profits of these corporates in case of sustained rupee depreciation or appreciation.


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