Vulnerability to Weak Rupee High, but Below FY13 Levels: Among 500 top listed borrowers (ex-banking and financial services), 234 corporates had a negative sensitivity to rupee (INR) depreciation in FY14, says India Ratings and Research (Ind-Ra). 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 corporates in FY13. These net foreign currency (FC) spenders account for 45% of the FY14 total consolidated debt as well as 37% of FY14 consolidated FC debt. The agency estimates that in FY15 the situation may not have shown a meaningful improvement over FY14.
Net Forex Outflow Grows at a Slower Rate: During FY13 and FY14, the aggregated net FC outflows (forex inflows minus forex outflows) of these 500 corporates 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 due to 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.
Sectors Positively Affected by Rupee Depreciation: The net exporting sectors IT and pharma are among the more efficient FC earners. Rupee depreciation by 1% is expected to improve the absolute EBITDA (median) of IT corporates by 1.8% (FY13: 2%) and that of pharmaceutical corporates by 1.63% (1.84%). The textile sector also showed a positive sensitivity of 0.7% in FY14 (median FY13: 1.2%). During the last three years, the textile sector has witnessed healthy overseas demand, lower raw material prices and improved export competitiveness.
Sectors Negatively Affected by Rupee Depreciation: Fertiliser and consumer durables are the sectors with prominent negative sensitivity. 1% rupee depreciation would reduce the absolute EBITDA of corporates in the fertiliser sector (highly import dependent) by 2% (median FY13: negative 2.1%) and would shave off 0.37% (median) of operating profit for the consumer durable sector (negative 0.3%).
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, these corporates would be in a position to pass on higher rupee costs in subsectors where regulatory intervention is limited.
Worries for Leveraged Importers: According to FY14 data, the operating profit of 180 of the 234 net importers will fall by no more than 1% for 1% rupee depreciation. However, this group has a standalone median leverage of 6.4x, implying low tolerance to sharp rupee depreciation. A higher negative sensitivity is exhibited by 32 corporates whose operating profit may fall by 1% to 3% for every 1% rupee depreciation. The median leverage for this group is 7.5x. Given the current high cost of hedging dollar liabilities (estimated at around 700bp USD-INR forward premiums), an un-hedged sustained currency shock (rupee depreciation) can deteriorate their credit profiles further.