How will a sliding Rupee impact the credit ratings of companies?

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MUMBAI: Rising interest rates and a sliding rupee could hurt Indian companies that binged on overseas loans riding low-interest rates as rating companies begin to relook at them. Companies with a major component of their revenues generated in rupees will be more vulnerable to a downgrade.

Computer hardware, steel, fertiliser, and coal importers face a possible downgrade, while companies from sectors such as pharma, paper, tea and textile firms may benefit from an upgrade, said, chief rating officers. Even the outlook can be revised.

“We have begun the process of assessing the rupee’s depreciation on our universe of companies with offshore payables and receivables,” said K Ravichandran, chief ratings officer at ICRA. “We are going by each sector, assessing external foreign currency debt and a net dependence on imports and exports in detail.”



The rupee lost more than 6 per cent this calendar year and ranks among the worst-performing Asian currencies. It hit a new lifetime low at 79.12 a dollar on Friday.

“In a couple of weeks, we should be able to complete the portfolio review,” he said.

A company with no natural hedges and partly hedged external borrowings become a potential candidate for a rating downgrade if its revenues are fully realised in rupees. Sometimes, a company only covers currency risk for its interest payments to overseas subscribers to its bonds and the principal is left uncovered.

If a local borrower is facing principal repayments now, this dampens creditworthiness and rising debt burden. You pay more rupees per unit of the dollar now.

“We are now closely evaluating the impact of the rupee’s rout on local companies,” said Sachin Gupta, chief rating officer at CARE Rating. “A dollar-denominated borrowing, coupled with the immediate impact of inflation, is a double whammy on companies that source revenues fully in rupees.”

“Companies rated in the lower rank of Investment Grade and High Yield category may face rating downgrades first due to the rupee depreciation,” he said. This means companies rated BBB+, BBB and BBB- along with BB+, BB or BB- are prone to rating actions.

The credit rating ratio, or upgrades over downgrades, dropped 83 basis points in the June quarter. The gauge is at 2.73 per cent versus 3.56 per cent in the March quarter, according to Prime Acuite Database.

“Renewable sector could get hurt with currency depreciation as overall capital costs go up, and also unhedged overseas credit would pinch during settlement,” said Abhishek Bhattacharya, senior director at India Ratings. “This adds to other pressure points on EBIDTA margins during this quarter which has already started reflecting in our increasing downgrade to upgrade ratio.”

Some companies may not be able to pass on rising prices to end consumers immediately, which will likely put pressure on their margins until demand revives later this year around festival season.

Gems & Jewellery, Telecom, oil marketing companies, auto components, and EPC companies are some of them.

“Rising interest rates and a weaker rupee induced by the high volatility in the global markets along with increased input costs, are likely to impact corporate revenue and profitability growth in the near term,” said Suman Chowdhury, chief analytical officer at Acuite Ratings.

A commodity super cycle however could well be a blessing for a bunch of local manufacturers, whose products can now be sold on local turf. Importers could well be forced to buy metals, papers, and agrochemicals from local companies due to elevated offshore costs.



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