50% of rated Indian cos getting profitability boost from weakening rupee: SP
New Delhi, November 10, 2022
‘Exports helping; hedging helping firms with dollar debts’
S&P Global Ratings on Thursday said about half of the Indian companies that it rates are getting a boost in their core profitability from rupee depreciation.
“Much of our rated India corporate portfolio has sizable U.S.-dollar linked revenue and, therefore, is not exposed to rupee depreciation. This encompasses entities in the IT, metals, and chemicals sectors. About half of the firms we rate are getting an EBITDA boost from currency weakening,” the US-based rating agency said in a report.
EBITDA or earnings before interest, taxes, depreciation and amortisation is a measure of a company's operating profitability.
S&P said domestically-driven sectors, such as telecom, are also well placed to withstand the rupee depreciation due to their hedging policies.
“Bharti Airtel has swapped half the principal of outstanding dollar debt -- and all its interest expense -- on this debt over at least the next 12 months,” S&P said.
Information technology firms, like Wipro, Infosys, and HCL Technologies that export services denominated in dollars, but whose costs are largely in rupee, are clear winners.
“Local metals firms such as Vedanta Resources are also getting an earnings gain. The company has guided that annual EBITDA will rise by about $50 million every time the Indian rupee (INR) drops ₹1 against the dollar,” S&P said.
It said infrastructure entities are most exposed to currency risk among Indian corporates and renewable players in particular have high capex spending and a heavy reliance on dollar debt.
“Still supportive onshore funding environment has also helped Indian companies manage the weaker offshore funding markets. Key onshore benchmark rates have risen about 200 basis points in the year to date, less than that seen in many offshore markets.
"This has made local markets an attractive alternate source of capital. This will give rated issuers a funding option to repay offshore bonds coming due through 2024,” S&P added.
To tame inflation, the Reserve Bank has raised key policy rates by 190 basis points since May, taking interest rates to a three-year high of 5.9%.
In the report titled 'Asia-Pacific's Strong-Dollar Problem: Inconvenience Today, Headache Tomorrow', S&P said Asia-Pacific is in the middle of a set of rapid interest rate hikes coming out of the U.S.
"We expect the macro pressures to build on regional foreign-exchange rates, as apparent in widening current account deficits emerging in many countries.
"Firms that have difficulty passing on their higher input costs, including currency impact, to their customers, are more vulnerable," said S&P Global Ratings credit analyst Simon Wong.
"On the other hand, firms that proactively hedge their currency mismatch and those with material U.S. dollar revenue and local costs are more resilient.”