At a time when Indian companies are finding it difficult to maintain healthy profitability, a significant swing in the value of Indian rupee could be an additional headwind for several Indian corporates. Fitch Rating on Monday in a note highlighted Indian companies whose financial standing can weaken or strengthen with a 15% depreciation in the value of rupee. This report examines the potential impact of a rupee depreciation against the US dollar on 21 internationally rated corporates in India.
After considering parameters like what companies earn in dollar terms, their capex spending in dollar and dollar-denominated debt, the rating agency said that Power Grid Corp (PGCIL), NTPC, Bharti Airtel and Lodha Developers are most exposed for a negative impact. It however added that for regulated utilities like PGCIL and NTPC, tariff mechanisms will capture higher capex costs over tariff cycles, minimising the negative impact over time.
According to Fitch, HPCL, IOCL and Adani Port & SEZ ( PSEZ) are set to benefit the most from rupee depreciation as “their dollar earnings are sufficient to more than offset the negatives of dollar debt and capex.”
While foreign currency debt of companies like RIL, Tata Steel, and IOCL account for the larger chunk of their gross debt (90%, 82% and 61%) respectively, RIL and IOC also generate significant EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs) in US dollars providing them with a natural hedge against their foreign currency balance sheet exposure.
Fitch added that most of the remaining companies with leverage above 4x have a comparatively low mix of foreign currency debt to total debt. The rating agency, however, added that the credit profiles of SAIL, Indiabulls Real Estate (IBREL) and PGCIL could still be negatively affected if the rupee were to weaken substantially, given their relatively high leverage ratios and their moderate foreign currency debt-to-gross debt exposure at around the 30% level.
As per the Fitch report, leverage of 14 corporates will be positively affected by higher EBITDAR, due to US dollar-based revenues and limited cost increases. For companies with significant EBITDAR in dollars including HPCL, IOCL, APSEZ, Tata Steel, and Tata Motors leverage is expected to fall the most.
Conversely, leverage will rise for corporates with minimal EBITDAR in dollars, including IBREL, Power Grid, NTPC and Bharti Airtel.
Fitch argues that the negative impact of higher dollar denominated capex will not negate the positive benefit of higher EBITDAR for most corporates. However, for PGCIL, NTPC, Bharti Airtel and GAIL, which have no EBITDAR denominated in dollars, may see a negative impact on cash flows.