Top corporates’ ability to withstand currency shocks limited: Ind-Ra

Mumbai, Jan 27 (IANS) Credit ratings agency India Ratings and Research (Ind-Ra) says a 10 per cent rupee depreciation in 2017-18 will negatively impact top corporates as their ability to withstand currency-related shocks are "fairly limited" -- with a major portion of borrowings being unhedged.

According to the agency's report -- Corporates Unprepared for Managing Foreign Exchange (FX) Risk -- the depreciation of the rupee will increase the aggregate net leverage, while interest coverage will reduce.

The report predicts that the aggregate net leverage of top 100 Indian non-financial foreign exchange (FX) borrowers will increase in the event of a 10 per cent rupee depreciation in 2017-18.

Besides, the firm said that top corporates are unprepared for managing foreign exchange (FX) risk, with 64 per cent of exposure being unhedged.

"The scenario that we have presented of 10 per cent depreciation and a 50 bps hike in the rate of interests may be a case of an extreme scenario that we would anticipate," Rakesh Valecha, Senior Director and Head of Core Analytical Group at India Ratings, told BTVi in an interview.

"If the currency were to depreciate, I think there are about 75 companies out of these 100 companies which potentially could be negatively impacted. And that's quite a significant number. And in terms of the exposure at risk, I think we are talking about roughly 15 trillion out of 19 trillion (rupees) that has foreign currency exposure. That's the one which remains at risk."

The Ind-Ra report revealed that nearly 80 per cent of debt with all AAA-rated entities are unhedged which means that when rupee weakens, these top corporates will come under severe pressure.

"So, I think there's concern more in terms of the amount of deterioration given that the leverage levels of most of these corporates continues to remain high, so the ability to withstand any currency shock is fairly limited at this moment," Valecha said.

"A lot of them (companies) are public sector undertakings, so they have the ability to withstand it. What's worrisome is that most of these entities also have a fair amount of leverage on their balance sheets," he added.

"So, if the currency does depreciate, it takes a knock on their leverage. Thus, it means the company actually gets into a problem, obviously they have the ability to withstand some part of it, but beyond that there might be some amount of deterioration that might happen in the credit quality."

The credit ratings agency further pointed out that of the total 19 sectors forming a part of the study -- 10 are highly sensitive to rupee movement, of which seven will be negatively impacted and three will reap positive benefits out of rupee depreciation.

The report elaborated that the total FX exposure stood at Rs 19.5 trillion - the aggregate hedge cover of which was 36 per cent.

The agency stated that the FX risk of corporates has moderated over the last four years, as India's overall trade deficit reduced to $119 billion in 2015-16 from $190 billion in 2012-13.

The widening trade deficit could intensify the impact on the credit profile of corporates unless currency risk management improves significantly, the report explained.