Rated Indian infrastructure firms most exposed to currency risk: S&P

Much of corporate portfolio has dollar-linked revenue and is not exposed to rupee depreciation

Infrastructure entities are most exposed to currency risk among Indian corporates, said rating agency Standard and Poor’s (S&P) on Thursday.

Renewable energy players in particular have high capex spending and heavily rely on dollar debt. Over the next 12 months, rated Indian renewable companies will likely have to raise funds equal to nearly one-third of their existing debt. The agency did not quantify amounts.

These companies will need capital for capex targets and refinancing. They should be able to raise funds domestically, rather than using high-cost offshore debt, S&P said in a report called ‘Asia-Pacific's Strong-Dollar Problem: Inconvenience Today, Headache Tomorrow’.

According to Clearing Corporation of India's data, Rupee at 81.47 (on November 9) has depreciated about 10 per cent against US dollar in 2022.

The dollar’s strength–a source of much pain among Asia-Pacific corporations historically–has been mostly manageable this year. However, it has increased input costs as rising rates hit pockets of some rated portfolios.

S&P said rated airports in India have raised sufficient funds to meet capex and have limited refinancing needs over the next 12-24 months. Regulated utilities will benefit from cost pass through mechanisms, which account for hedging costs and currency movement.

Most rated Indian companies adopt a full hedge for principal and interest. However, the hedge is often imperfect. They adopt a call-spread structure to reduce their cost of hedging the principal, which exposes them to currency risk in case of sharper than expected depreciation.

Rated India corporate portfolio has sizable US-dollar linked revenue and, therefore, is not exposed to rupee depreciation. This includes entities in the information technology, metals, and chemicals sectors. About half of the firms we rate are getting an EBITDA boost from currency weakening.

S&P’s report said there is only one publicly rated firm which has a large mismatch between revenues and balance sheet exposure: ANI Technologies, which operates the ride-hailing platform Ola Cabs. Ola's revenues are largely rupee denominated while it has unhedged dollar debt. However, the risk for ANI Technologies is mitigated as it holds dollar reserves of a similar size to its debt in the currency.

Other Indian companies, such as telecom, are also well placed to withstand rupee's depreciation due to their hedging policies. For example, Summit Digitel Infrastructure fully hedges all offshore debt. Bharti Airtel has swapped half the principal of outstanding dollar debt--and all its interest expense--over at least the next 12 months.