DEBT A PROBLEM FOR INDIAN CORPORATES

Fitch Ratings says the majority of its portfolio of internationally rated industrial corporates in India has adequate hedging arrangements in place to minimise any potential reductions in operating cashflows arising from the rupee rout.

Moreover, most have sufficient headroom to absorb an elevation in reported debt levels post FX translation adjustments. Nevertheless, credit profiles are likely to weaken over the next 12 months and issuers on Negative Outlooks are in particular vulnerable to a downgrade if their operations deteriorate and the rupee rout is sustained. The Indian rupee (INR) has depreciated 20% versus the USD since the beginning of May 2013.

At the operating level most of Fitch’s rated portfolio of Indian industrial corporates are either naturally hedged via import parity-linked selling prices, or have hedging arrangements in place for more than 50% of their FX exposure (where changes in USD/INR are typically reflected with a lead time of three months). Accordingly higher raw material prices, due to the weaker rupee, on annual cash flow generation is not likely to be significant, but in the short term there is likely to be a month-to-month impact on the re-statement of debt, receivables and payables.

Metal companies including Tata Steel Limited(TSL, BB+/Negative) and Vedanta Resources (BB+/Stable) are likely to benefit at the operating level as most of their selling prices are denominated in USD while their costs are denominated in INR.

However, the weakness in the domestic economy could negate these benefits to some extent. The Steel Authority of India (SAIL, BBB-/Stable) imports approximately 80% of its coking coal requirements, but its product prices are import parity-indexed and hence appropriately hedged, but with a lead time of one quarter.

The more significant risk is likely to be higher reported debt levels stemming from FX translation adjustments, particularly for those companies with substantial foreign currency (FC)-denominated debt which is typically held at offshore subsidiaries. Higher reported debt levels will have a negative impact on a number of key credit metrics including financial leverage.

The ratings of TSL and Ballarpur Industries Limited (BILT, BB-/Negative) are already on Negative Outlook due to operational weakness and capex, and hence have limited headroom to cope with FX-induced higher debt levels. FC-denominated debt currently stands at USD444m (48% of total debt) for BILT and USD8bn (70% of total debt) for TSL. Fitch will analyse the performance of these companies for any significant weakening of operations which, coupled with higher debt levels, may result in a downgrade.

In the case of Tata Motors Ltd (TML, BB/Stable), UK-based Jaguar Land Rover plc accounts for over 75% of its revenue and 90% of its EBITDA. As the proportion of TML’s consolidated debt in FC currency is lower at 76%, the final impact from INR depreciation is likely to be positive.

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