Forex debt: India Inc faces a tough task as 64% of foreign loans unhedged

Some large companies have not taken cover on dollar loans, which can ruin their financial metrics

Tata Motors foreign exchange losses in the December quarter are a warning to Indian companies sitting on debts of Rs 8.1 lakh crore, of which 64 per cent is unhedged.

Analysts say any further depreciation in the rupee due to changes in the US Federal Reserve’s monetary policy will lead to rising losses for energy, metals and mining companies, which have the highest unhedged forex debt. 

The rupee depreciated 2.7 per cent against the dollar in 2016 and 9.9 per cent since 2013. Many Indian companies now have large foreign operations with loans in various currencies.

“Some large companies have not taken cover on their dollar loans, which can ruin their financial metrics,” said a chief financial officer. “Most of these companies are in oil and gas and power.”

As profitability is expected to remain subdued in 2017, any fluctuation in the dollar-rupee rate will mean companies pay more for the same loan, according to analysts.

In a recent study of the top 100 forex debt borrowers, India Ratings found a staggering 81 per cent had not taken cover on their foreign loans. Indian companies have 38 per cent of their loans in foreign currency. 

A forward cover, which costs extra, is used for foreign loans to insure against foreign exchange fluctuations. 

“This is like a ticking time bomb,” said an analyst. “If the rupee falls further, some of the top companies will have to shell out a substantial amount. Energy companies are in trouble, as 48 per cent of foreign loans are with them,” he added.

An uptick in crude oil prices, coupled with a depreciating rupee, will be a double whammy for energy companies, which have merely 12.6 per cent and 43 per cent, respectively, of forex debt and trade exposure hedged. Metal and mining companies had hedged 62 per cent of their forex debt and 26 per cent of trade, India Ratings said.