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Wednesday, Sep 25, 2002

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Firm rupee boosts corporate leveraging

C. Shivkumar
Abhrajit Gangopadhyay


THE gearing ratios of corporates in the country have improved considerably, with the strengthening of the rupee against the dollar in the last few weeks.

The rupee has strengthened by close to 70 paise per dollar since April, induced by strong foreign exchange reserves now at a record $62-billion level. It is forecast to increase to $70 billion by the end of this fiscal on the back of strong current account and non-debt capital account inflows.

As a result, corporates' foreign currency liabilities in their books are expected to shrink. Speaking to Business Line, Mr Anil Singhvi, whole-time Director of Gujarat Ambuja Cement Ltd, said, "With the improvement in the debt-equity ratio, corporate leveraging capacity has become better and we expect to see a further improvement." In fact, some corporates are likely to increase their forex borrowings. "The major impact could be a favourable interest cost', Mr Kumar Kanetkar, Executive Director - Finance, Widia India said.

The improvement in the debt-equity ratio is also expected to translate in a better debt service coverage ratio (DSCR). This ratio (interest and principal service as a component of earnings) measures the debt carrying capacity of borrowers. For most corporates during the last few years, the weakening of the rupee had resulted in deterioration of DSCR. Some of the corporates had resorted to long-term external commercial borrowings for tenors in excess of five years when the exchange rate was about Rs 44 between 1999 and 2000, when international funds were cheap even after loading of forward premiums. With weakening of the rupee, the DSCRs of these companies had dropped to the upper limit of 1.2 times making it difficult for corporates to raise additional debt resources without capitalising some of their debt service costs. The standard prescribed DSCR is 1.5 times.

But, analysts said that capitalising of the outstanding debt was no solution given the current state of the equity markets, especially when market prices are currently being quoted at below book values of several companies. Insignificant improvements in the top line would not be any solution, they said. "Equity floats at this time for capitalisation will only result in a further weakening of the earning per share and consequently their prices," Mr Singhvi said.

However, bankers are not prepared to concede that the improvement in the rupee value will result in an improvement in the leveraging capacity of the companies. "So long as the foreign exchange liabilities remain on the balance sheet, the risk perception will not change," said Mr Bhaskar Ghosh, Managing Director of IndusInd Bank.

As a result, most corporates with long-term foreign exchange liabilities are in the process of shedding or reducing some of these borrowings to improve their costs. Some of the methods include outright prepayments of their foreign currency liabilities and substituting them with rupee debts. This is being done by corporates who have little or no natural hedge in the form of foreign exchange earnings. Yet, others are in the process of resorting to the swap market and entering into long-term swaps. This is because both six-month and one-year premiums have converged to 4 and 4.1 per cent in anticipation of foreign currency inflows exceeding outflows.

Banking sources said companies that have begun tapping the market for shedding such liabilities included public and private sector power companies and private sector refineries. These companies currently have virtually no natural hedge mechanism since their entire revenue streams are domestic currency denominated.

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