Despite the Indian rupee appreciating over 5 percent this year against the dollar, the credit profile of exporters remains stable, said India Ratings and Research in a research note on Friday.
This is because nearly 85 percent have low to moderate sensitivity to an appreciating currency or benefit positively from it. Further, most of the exporters have low leverage and are thus able to mitigate any negative impact from a stronger rupee. Exporters also had low exposure to forex debt of Rs 2.8 lakh crore as of the end of fiscal 2016, said the rating agency.
However, given the depreciating bias seen in the currency in December 2016, exporters may have left exposures unhedged. This could lead to some negative surprises, cautioned India Ratings. Exporters had around 50 percent of their forex debt hedged and less than 20 percent of forex trade exposure hedged in fiscal 2016. This trend is estimated to remain unchanged even in fiscal 2017.
India Ratings said that operating profits of exporters could be marginally impacted due to a stronger Rupee. A 5 percent appreciation in the currency can lead to a 2 percent drop in profits, it estimates. However, a pick-up in merchandise exports driven by the recovery in global commodity prices, better demand conditions in the U.S. and the E.U. will aid overall export growth.
India Ratings believes exporting sectors namely, pharma, IT, textile, auto and gems and jewellery are unlikely to see a significant impact on the credit profiles from the rupee appreciation given the low forex exposure of Rs 2.2 lakh crore. However, these sectors have hedged forex debt of up to 25 percent (except auto which has 82 percent hedged forex debt) and hedged trade of up to 56 percent.
India Ratings believes a sustained currency appreciation can negatively impact the operating profitability for these sectors due to the unhedged trade exposure of up to 44 percent .
Among the importing sectors, oil and gas benefits from a natural hedge and holds maximum forex exposure (Rs 9.3 lakh crore), followed by metal and mining (forex exposure of Rs 2.6 lakh crore). For the oil and gas and metals and mining sectors the debt hedged is 13 percent and 62 percent, while trade hedged is 43 percent and 26 percent, respectively.
The assumption takes into account the impact on corporates balance sheets due to rupee appreciation from Rs 66.3 per U.S. dollar as of March 2016. The agency notes that of the 100 forex corporate borrowers analysed, 61 provided disaggregated information regarding year-end forex debt, receivables and payables. For the remaining 39 entities, the agency has made suitable assumptions on account of lack of availability of information. Lack of complete and reasonable information dissemination emerged as the major challenge of the study, reinforcing the need for superior reporting standards, it said.
While the rupee has appreciated, some correction from here on cannot be ruled out. Thus India Ratings in its report ‘Corporates Unprepared for Managing Foreign Exchange (FX) Risk; 64% of Exposure Unhedged ' analysed the impact on the credit profile of the top 100 listed and unlisted external commercial borrowers (ECB) on account of forex risk in the event of 10 percent rupee depreciation.
Of these 100 forex borrowers, 69 are net importers while 31 are net exporters. The credit profile of 60 of the 69 net importers could be negatively impacted, of which 36 have a high negative sensitivity to rupee depreciation.
Most importers have high leverage levels and are likely to be negatively impacted due to their high forex debt of Rs 5.3 trillion and forex trade of Rs 8.8 lakh crore. The agency believes prohibitively expensive cost of hedging dollar liabilities compared to thin EBITDA margins could weaken the credit profiles of importers in a depreciating rupee environment.
On an aggregate basis, importers have 30 percent of their debt hedged and 42 percent of trade hedged.
India Ratings believes that while the impact of a depreciating currency is likely to be much more negative than that of an appreciating currency, volatility in the currency could provide greater surprises on both sides.
Given the macro fundamentals and the capital flows, India Ratings does not expect volatility to be the order of the day.
India Ratings and Research, a wholly owned subsidiary of Fitch Group, is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.
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