The incremental impact of currency shocks in case of a US Fed rate hike tomorrow will be limited, though the average credit profile of top domestic corporates remains the worst in a decade, says a report.
“While the aggregate credit profile of the top 500 borrowers continues to hover around the worst in a decade, the incremental impact of a currency shock will be limited,” India Ratings said in a report today.
The agency also said that the impact of a rate hike will not topple the boat for majority of top corporate borrowers as only around 37 per cent of overall foreign currency debt belongs to corporates with negative sensitivity and these companies may be more adversely affected in case of the rupee depreciation.
“Among the top 500 corporates by the size of their balance sheet debt, only 13 have a worrisome combination of high leverage and high negative sensitivity,” the report said.
It said the gap between forex outflows and inflows has narrowed since FY13, which has relatively reduced aggregate vulnerability of corporates to forex shocks.
The report further said if the US Fed increases the near-zero repo rate it has been following since the 2008 global credit crisis that began in the US, the resultant spillover effect on emerging market currencies including India could see the rupee fall by 5-10 per cent.
The report, however, said it is not a forecast of the rupee level in case of a spillover effect but these are the levels used for analysis.
Corporates with negative sensitivity, which is the percentage change in absolute EBITDA for 1 per cent rupee fall, declined marginally, while corporates with positive sensitivity improved marginally between FY12 and FY14.
It said 1 per cent rupee fall on a sustained basis, improves the absolute EBITDA (median) of IT companies by 1.8-2 per cent, and pharma by 1.6-1.8 per cent.
However, the efficiency of earning forex in the IT sector has been decreasing since FY12, while for pharma companies it has been decreasing since FY13. “These trends are likely to continue in FY16,” the report said.
However, textile exporters and exporters from the auto ancillaries and chemicals have limited benefit of rupee depreciation due to their cost structure.
The median interest coverage ratio of the 500 largest borrowers was the weakest in 10 years in FY14. In FY15, this had hit a new low of 1.49x, though the rate of deterioration over FY14 was limited.