Indian companies are likely to be severely impacted by the rupee’s depreciation against the dollar as they have large foreign currency debt on their books, which is only partially hedged, according to Crisil Research.

Mark-to-market losses and higher debt servicing costs are likely to be key pressure points in the near-term for India Inc., which collectively had forex debt outstanding of $200 billion as of March 31, 2013, it said.

According to Mukesh Agarwal, President, Crisil Research, “For companies in the CNX Nifty (excluding banking and financial services), around 40 per cent of debt is denominated in foreign currency.

“In total, corporate India had a forex debt outstanding of over $200 billion as of March 31, 2013, of which close to 45 per cent is short-term debt. Moreover, only half their forex exposure is hedged.

Persistent weakness in the rupee and heightened volatility has reduced the benefits of borrowing overseas.”

Sectors to be hit

From the growth and profitability perspective, sectors that will be negatively impacted by the rupee’s depreciation include automobiles, auto components, airlines, consumer durables, oil marketing companies (OMCs) and fertilisers.

The increase in fuel costs will hurt the demand for automobiles, especially small cars, as fuel alone accounts for nearly 25-30 per cent of the ownership cost of a small car during the year of purchase.

Airlines with a high proportion of revenues accruing from domestic operations will also be hurt as 70 per cent of their operating costs are incurred in dollars, and their ability to pass on any cost increase is limited.

“We do not expect diesel prices to increase by more than Rs 1.50 per litre from the current level; therefore, a weak rupee would increase the under-recoveries of OMCs. We foresee under-recoveries touching Rs 1,05,000 crore in 2013-14, 10 per cent higher than our previous estimate,” said Crisil Research.

Biggest beneficiaries

The upside for export-oriented companies, generally the biggest beneficiaries of a depreciating currency, will also be limited as clients are likely to renegotiate deals.

Tier-1 IT services companies are expected to report a 50-100 basis points (bps) improvement in EBITDA (earnings before interest, tax, depreciation and amortisation) margin (which measures operating profitability) in 2013-14 due to a pick-up in business momentum and utilisation levels.

Others who will benefit due to rupee depreciation include pharmaceuticals and readymade garment exporters, crude oil producers and pure-play refineries.

“Demand growth and competitiveness, rather than currency movements, are more critical to determining growth and profitability. Our view is corroborated by the modest performance of export-oriented industries in 2012-13, a year in which the rupee depreciated by 14 per cent against the dollar on a year-on-year basis.

“Around 180 listed export-oriented companies reported a marginal 1-2 per cent growth in revenues in dollar terms and 60-bps rise in EBITDA margins in 2012-13, despite a weak currency,” says Prasad Koparkar, Senior Director, Crisil Research.

The rupee’s depreciation will lift the input costs across many sectors amid weak demand environment as reflected in low double-digit topline growth expected in 2013-14.

Crisil Research expects the rupee to strengthen from its current levels, but the 2013-14 average will still be 5-8 per cent weaker than the 2012-13 average.

(This article was published on July 10, 2013)
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