Cos stay step ahead, convert loans to dollar denomination

Written by fe Bureau | Mumbai | Updated: Oct 26 2011, 08:27am hrs
With the RBI choosing to continue with its tight monetary stance, companies that have borrowed heavily said they had already factored in the rate hikes and mitigated the impact by converting their rupee loans to dollar-denominated loans.

India's largest private sector carrier, Jet Airways, has been feeling the pinch of the rising interest costs. "The RBI's aggressive rate hike cycle has already had an effect on the interest costs in the last quarter of the financial year 2010-11, said a senior official of Jet Airways, who did not wish to be quoted as the airline is in a 'silent period' before its second quarter financial results' announcement.

Since then, we have made an effort to convert our loans to dollar loans. The company plans to convert R3,000 crore of its rupee loans to dollar loans, he added. M Shiv Kumar, the airline's chief financial officer, told analysts in a presentation in July this year that Jet had a total debt of R13,530 crore up to July 2011.

An increase in the repo rate will make borrowings from the RBI costlier for banks, while an increase in reverse repo rate can lead them to transfer more funds to the RBI due to attractive interest rates, causing more money to be drawn out of the banking system. India's largest steel maker, JSW Steel, felt the impact of low rupee in the second quarter of the current financial year with forex translation losses of R512.98 crore. The company still finds dollar loans advantageous in the light of the aggressive rate hike regime of the RBI. "We still see advantages of about 3-4% in external commercial borrowings," said V K Nowal, director and CEO, JSW Steel. As of September 2011, the company had a net debt of R12,106 crore.

Meanwhile, debt-ridden national carrier Air India has already sought the civil aviation ministry's permission to convert its short-term loans amounting to R18,000 crore into long-term ones, thereby saving interest payments of R600 crore per year. "The proposal is under review and the finance ministry is yet to take call on it, a senior Air India official said, not wishing to be named.

Indian telecom companies, too, borrowed heavily to meet the cost of building infrastructure to support their expansion plans. Idea Cellular, India's third largest telecom company by revenue, had a net debt of R11,200 crore as on September 30, 2011, with the net debt-to-equity ratio at 0.89 and net debt-to-ebitda (annualised) ratio for the quarter at 2.68. "Right now, we are going for more dollar loan to insulate ourselves from the increased rupee interest burden, said Akshaya Moondra, chief financial officer, Idea Cellular. We are financing most of our equipment purchases and repaying our rupee loan, which is due in the course of time. He added that the company's debt is partly funded by internal accruals. All the new capex that we are raising is in the form of dollar loans.

In a note issued on October 21, business research and consulting firm Frost & Sullivan said that India expects $132 billion or R6,50,000 crore of investments in the telecom sector to achieve the targets that the government has set for itself over the next 20 years.

The real estate segment has also been one of the biggest hit owing to the high interest rates on loans. "Banks are still the cheapest source of funding for real estate sector," says Sanjay Kabra, chief financial officer, Sunil Mantri Group. "The challenge is not the cost of borrowing, but convincing banks to lend to the sector. He said that banks are still cautious in lending to the sector as most real estate companies have a fairly leveraged balance sheet.

Also the track record of borrowers is something that makes banks circumspect," he added. According to Kabra, the cost of borrowing for his company has gone up to 15.5% from 13.5% about a year-and-a-half ago. He added that this is not a challenge yet, given such loans are cheaper than borrowing from private equity funds or non-banking finance corporations. Others said the RBI move is a double whammy. "It has become a vicious circle," says Bharat Dhuppar, chief marketing officer, Omkar Realtors & Developers. "On one side, the supply of apartments has reduced and the costs for developers are going up, whereas on the other, sales transactions have gone down as EMIs are rising and people are deferring their purchase decisions."

Uday Phadke, president, finance, legal & financial services sector, Mahindra & Mahindra, said the company hardly borrowed from the Indian banking system and, hence, will not be impacted by the rate hike. A spokesperson from Tata Motors echoed the view, saying, "The rate hike per se does not have any impact on the company's borrowing. Tata Motors' net debt on a standalone stood at R13,385 crore as of March 31, 2011.