Mumbai: India Ratings and Research (Ind-Ra) on Tuesday said that a depreciating rupee remains a significant risk for corporate balance sheets with significant exposure to foreign debt as it could impact their credit profiles.
What is worrying more is that a significant portion of the foreign debt is unhedged leaving companies with weak financials more vulnerable to fluctuations in the foreign exchange rate.
According to Ind-Ra, about hundred forex borrowers had 64 per cent of their gross foreign exposure unhedged. The agency believes that sectors which are dependent on imports such as oil and gas, metal and mining, airlines, chemical and fertiliser, paper and paper products, which are highly sensitive to forex movements, could witness a sharp deterioration in their credit profile, if rupee was to depreciate.
These sectors together have 63 per cent of Rs 13.5 lakh crore of gross exposure unhedged. There are 29 sub investment grade outstanding corporate borrowers who had hedged only 26 per cent of their foreign exchange exposure. These companies according to the rating agency could be highly vulnerable given their existing weak financial strength.
However, the impact on the remaining 71 investment grade corporates where 38 per cent of their foreign exchange exposure has been hedged could be cushioned given their strong business model and financial strength.
The agency analysis indicates that 54 entities with Rs 10.1 lakh crore in total foreign currency debt are highly sensitive to forex movements while 46 entities with Rs 11.2 lakh crore debts remain low to moderately exposed.
For the Oil & Gas sector, the concern could potentially compound as an uptick in the crude oil prices coupled with rupee depreciation spells double whammy for the corporates with merely 12.6 per cent and 43 per cent of foreign currency debt and trade exposure hedged respectively.
However, according to Ind-Ra, sectors such as gems and jewellers, IT and pharma could experience an improvement in their financial profile owing to their advantage of being exporters and hedging practices calibrated to benefit from rupee depreciation. Similarly sectors namely auto and automotive suppliers and cement are likely to benefit as they have nearly 70-100 per cent of their forex exposure hedged.
Ind-Ra has also flagged off concerns regarding mutual funds exposure to these highly sensitive corporates. Of the top 100 corporates, MF debt portfolio is restricted to only 31 firms corporates with majority enjoying high investment grade rating.
