Exporters also benefit from their low exposure to FX debt of INR2.8 trillion (total FX debt of 100 corporates INR8.1 trillion) and low FX trade exposure (imports plus exports) of INR2.6 trillion (total FX trade of 100 corporates INR11.4 trillion) as of FYE16. However, it is possible given the depreciating bias which was prevalent in December 2016, the hedging practices may have titled towards unhedged exposures and the recent appreciation could provide negative surprises, more than anticipated. Exporters had around 50% of their debt hedged and less than 20% of FX trade exposure hedged in FY16, this trend is estimated to remain unchanged even in FY17.
While operating profits of exporters are likely to be marginally (2% fall from a 5% rupee appreciation) impacted, Ind-Ra expects a pick-up in merchandise exports driven by the recovery in global commodity prices, better demand conditions in the United States and the EU reflected in the improving consumption will aid to overall export growth.
Ind-Ra believes exporting sectors namely, pharma, IT, textile, auto and gems and jewellery are unlikely to have a significant impact on the credit profiles from the rupee appreciation given the low FX exposure of INR2.2 trillion (11% of total INR19.5 trillion). However, these sectors have hedged FX debt of up to 25% (except auto which has 82% hedged FX debt) and hedged trade of up to 56%. Ind-Ra believes a sustained currency appreciation can negatively impact the operating profitability for these sectors due to the unhedged trade exposure of up to 44% . Amongst the importing sectors, oil and gas benefits from a natural hedge and holds maximum FX exposure (INR9.3 trillion), followed by metal and mining (FX exposure of INR2.6 trillion). For oil and gas and metals and mining sectors the debt hedged is 13% and 62%, while trade hedged is 43% and 26%, respectively.
The assumption takes into account the impact on corporates balance sheets due to rupee appreciation from INR66.3/USD as of March 2016. The agency notes that of the 100 FX corporate borrowers analysed, 61 provided disaggregated information regarding year-end (FY16) FX debt, receivables and payables. However, for the remaining 39 entities, the agency has made suitable assumptions on account of lack of availability of information. Lack of complete and reasonable information dissemination emerged as the major challenge of the study, reinforcing the need for superior reporting standards.
While the rupee has shown appreciation some correction from here on cannot be ruled out and thus Ind-Ra in its report 'Corporates Unprepared for Managing Foreign Exchange (FX) Risk; 64% of Exposure Unhedged' analysed the impact on the credit profile of the top 100 listed and unlisted external commercial borrowers (ECB) on account of FX risk in the event of 10% rupee depreciation. Of these 100 FX borrowers, 69 are net importers while 31 are net exporters.
The credit profile of 60 of the 69 net importers could be negatively impacted, of which 36 have a high negative sensitivity to rupee depreciation. Most importers have high leverage levels and are likely to be negatively impacted due to their high FX debt of INR5.3 trillion and FX trade of INR8.8 trillion. The agency believes prohibitively expensive cost of hedging dollar liabilities compared to thin EBITDA margins could weaken the credit profiles of importers in a depreciating rupee environment. On an aggregate basis, importers have 30% of their debt hedged and 42% of trade hedged.
Ind-Ra believes that while the impact of a depreciating currency is likely to be much more negative than that of an appreciating currency, volatility of the currency could provide greater surprises on both sides. Given the macro fundamentals and the capital flows, Ind-Ra does not expect the volatility to be the order of the day.
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