Falling rupee to hurt India Inc badly

Dollar debt and higher import cost might impact earnings by up to 30%

Indian companies that have dollar- and euro-denominated debt on their books will face the music, as a falling rupee raises their repayments, hurting profits and balance sheets, warn analysts. Large companies that have a natural hedge like dollar export earnings will be able to brave the storm, but others, especially the import-dependent fertiliser and consumer durables industries, will face a double whammy of having to pay more to retire their dollar loans and to fund their imports.

So far in 2015-16, the rupee has depreciated 13.9 per cent and 6.6 per cent against the euro and dollar, respectively. "This is not good news for any company with a dollar exposure. It just adds to costs," said the chief financial officer of a large company.

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Oil marketing companies, however, will be able to pass on the higher costs to consumers and, hence, will not be much affected. While the rupee's fall will make crude oil imports expensive, the fall in oil prices itself will offset the pressure. "The fall in the rupee's value is good news for infotech and pharma companies with high export earnings but there are many mid-sized companies that do not have any cover for their dollar debt or any export earnings. We expect these companies to face trouble," said an analyst with a leading ratings agency.

Ratings agency Ind-Ra says highly indebted companies with net debt to Ebitda (earnings before interest, tax, depreciation and amortisation) of five times or more, are highly sensitive to rupee depreciation. As regards profitability, companies in the fertiliser, consumer durables and chemicals industries would be hit hard as every one per cent fall in the rupee may reduce their absolute Ebitda by one to five per cent, unless companies are able to pass on the higher costs.

A rate of Rs 68-70 a dollar on a sustained basis may reduce their absolute Ebitda by 10-30 per cent over their 2014-15 levels, it warns.

"Heightened two-way currency volatility for a sustained period makes it difficult for corporates to take appropriate pricing or hedging decisions. Many a times, exporters make very limited gains while importers incur heavy losses. Hedging-related losses often add to operation losses, worsening the impact," said Deep Mukherjee, senior director of Ind-Ra.

Companies in the metals and mining, fertiliser, textile, sugar, gems and jewellery industries may find it difficult to repay loans, as the debt servicing ability of these corporates is already stretched and sustained currency depreciation could push them into the stressed category.

In the event of rupee depreciation, around 13 corporates accounting for Rs 23,400 crore of combined standalone debt and nine companies with combined loans worth Rs 10,600 crore could face a double whammy of deterioration in credit metrics due to weakening of operational performance and already indebted balance sheets. Hence, the rupee depreciation would weaken their balance sheet strength apart from deteriorating their operating profits, according to the rating firm. It did not name the companies.