Rupee fall to inflate India Inc's foreign loan bill by $2 bn

The falling value of rupee may impact hard the profitability of Indian companies, which have tapped overseas loans, and the bottom lines this year are likely to take a hit of over $2 billion this year.

The corporates have been increasingly tapping overseas loans -- mostly in the US currency -- to save costs arising out of higher interest rates and liquidity constraints in the domestic market in the recent months, but the falling value of rupee seems to have negated the benefits, experts believe.

Rupee has depreciated by over 12% to close to 50-per-dollar mark currently from its near 44-level against the US currency at the beginning of August.

It was the worst performer among major Asian currencies with a decline of 5% in the past week alone and this downtrend has added to the woes of the companies having gone abroad for their borrowing needs.

Indian companies have borrowed close to $21 billion in foreign currencies through ECB (External Commercial Borrowing) window between January and July this year, as against a total amount of $18 billion in entire 2010.

The entities having raised such overseas loans this year include Reliance Industries, NTPC, Mundra Port and SEZ, Indian Oil, Bharat Aluminium, Vodafone Essar, Air India, GAIL, Adani Power, JSW Steel, Aircel, Tata Tele, Idea Cellular, Suzlon, IDFC, RCOM, REC, Indian Railway Finance Corp, M&M and BPCL, as per data available with the RBI.

In July itself, as many as 100 companies tapped overseas loans totalling over $4 billion. This included Mukesh Ambani-led RIL raising $1.09 billion for refinancing its old loans, Mundra Port ($150 million for ports business) and Indian Oil ($500 million for import of capital goods).

Besides, a number of telecom companies have raised overseas loans in recent months to refinance earlier rupee loans for payment of their 3G spectrum fees.

The analysts said that liquidity deficit and relatively higher interest rates in domestic market were prompting the Indian companies to tap cheaper dollar loans for funding their domestic business activities, imports, overseas acquisitions and refinancing of existing rupee loans.

However, the situation has turned around with a sharp rupee depreciation in past few weeks from a relatively stable trend in earlier months of the year, because of which many of the companies did not even hedge against the currency fluctuation risks, analysts said.

As a result, many of the companies might have to book mark-to-market losses on their books for this year unless the rupee reverses its downward trend, experts said, while adding that the current level of rupee depreciation pegs the estimated hit on their profits at over $2 billion.

Experts are of the opinion that those corporates which did not hedge their forex exposure, will have to bear the brunt of the current volatility in the Indian currency in the form of large forex-related liabilities.

"Most of the corporates, especially the PSU players, had kept their forex exposure unhedged and had expected the rupee to remain stable. But now most of them would see their liabilities shooting up significantly and many of them would be forced to mark-to-market losses on their income statement in the current year," SMC Global Securities Strategist & Head of Research Jagannadham Thunuguntla said.

Religare Capital Markets' Director and Strategist (Institutional Research) Tirthankar Patnaik said, "A depreciating rupee would mean a hit on the equity of the borrower on account of increased foreign currency liability [part that is not hedged] and higher interest rate payments."

He said that some companies have a policy of passing this increase liability to equity through profit and loss account (for payment of interest to be done in foreign currencies) which would mean a "hit on the profitability this year."

"The increasing interest rates globally would only add to the injury," Thunuguntla said, while adding that a 12-14% depreciation in the rupee would inflate their existing overseas borrowing exposure by about $2 billion.

Ashika Stock Broking Research Head (Equities) Paras Bothra also said that the rupee depreciation would be negative for the Indian companies with regards to their overseas loan, raised specifically in the US dollar.

Bothra pegged the impact at 5-10% of the companies' overseas loans, depending on the exchange rate at the time of their borrowings.