As many as 54 top corporate entities, with Rs 10,10,000 crore debt are “highly sensitive” to foreign exchange movements which could lead to a sharp deterioration in their credit profile. While mutual funds (MFs) have Rs 51,590 crore exposure to corporates with the negative impact of rupee depreciation, heightened forex pressure could keep Rs 37,200 crore of obligations coming up for maturity in 2018 vulnerable in FY18.
Credit profile of 42 of the 54 corporates holding Rs 8.9 lakh crore of the total debt at FY16 could weaken substantially. This is due to the high proportion of forex debt of 50 per cent and forex debt to total gross debt of 19 per cent. Import sectors such as oil and gas, metal and mining, airlines, chemical and fertiliser, paper and paper products which are highly sensitive to the forex movement, could witness a sharp deterioration in their credit profile, if rupee was to depreciate, India Ratings (Ind-Ra) has warned. “These sectors together have 63 per cent of Rs 13.5 lakh crore of gross exposure unhedged as of FY16,” India Ratings analyst Bansi Madhavani said. “As of FY16, 100 forex borrowers had 64 per cent of the gross forex exposure unhedged, with oil and gas, metal and mining, power, and telecom sectors accounting for 75 per cent of the gross forex exposure,” Madhavani said.
The highly sensitive sectors together have a gross outstanding exposure of Rs 14.7 lakh crore of the total Rs 19.5 lakh crore. “Many Indian banks have exposure in the forex debt of Indian companies,” said a senior banking source. In its Financial Stability Report for December 2016, the RBI has warned against a sharp rise in the non-performing assets (NPAs) of banks as “the banking stability indicator shows that the risks to the banking sector remained elevated due to continuous deterioration in asset quality, low profitability and liquidity”. The RBI’s stress test indicated that under the baseline scenario, the GNPA ratio may increase from 9.1 per cent in September 2016 to 9.8 per cent by March 2017 and further to 10.1 per cent by March 2018.
She said depreciating rupee remains a significant risk for corporate balance sheets. Although it may not derail the economic recovery, it could impact the credit profile of corporates, says India Ratings and Research (Ind-Ra). While 54 entities with Rs 10.1 lakh crore total debt are highly sensitive to forex movements, the remaining 46 entities with Rs 11.2 lakh crore total debt remain low-to-moderately exposed (less than 5 per cent impact in the credit profile).
The Ind-Ra study is based on a 10 per cent rupee depreciation scenario and a 50-basis point hike in global rates though this is not the agency’s base case assumption. The agency refused to disclose the names of corporates with vulnerable forex debt.
Of the top 100 corporates, MFs’ debt portfolio is restricted to only 31 corporates (majority rated ‘A’ and above), with a cumulative exposure of Rs 54,650 crore. Of this, Rs 51,590 crore belongs to corporates exposed to the negative impact of rupee depreciation.
Upcoming maturities in FY18 could amount to Rs 84,100 crore billion, assuming no material changes in the debt level and debt composition. Juxtaposing the debt hedging proportion on these obligations, Ind-Ra estimates 73.2 per cent of these obligations are unhedged. Given that Rs 37,200 crore of obligations reside with high negative impact corporates, heightened forex pressure could keep them vulnerable in FY18.
According to the Ind-Ra report, the widening of the trade deficit could magnify the stress for the high-sensitive forex borrowers. If the trade gap widens to peak FY14 levels of Rs 6.1 lakh crore (FY16: Rs 3 lakh crore), net leverage of high-sensitive corporates could rise to 7.5 times (FY16: 5.3 times) and interest cover could fall to 2.2 times (FY16: 3 times). “With increasing trade, debt levels could also increase from the current levels, thereby magnifying the stress on the high sensitive corporates,” Madhavani said.