-
Corporates
www.fitchratings.com 3 July 2012
India
Impact of Rupee Depreciation on Indian
Investment-Grade Corporates Largely On Stable Ground
Special Report
Limited Impact For Most: A sustained rupee depreciation is
unlikely to have a negative
impact on the credit ratings for most investment-grade issuers
that come under the Fitch
Ratings Indian National scale. Two hundred and seventy-four
(accounting for over 92% of
outstanding debt) of 302 publicly rated issuers are unlikely to
face a negative rating action
should the rupee trade between INR55/USD1 to INR60/USD1.
Some Negative Actions; Defaults Unlikely: The remaining 28
issuers may expect negative
rating actions, such as a change in Outlook or downgrade of the
rating, in the event of
sustained rupee depreciation. Fitch does not expect any of these
issuers to default.
Benefit For Exporters Capped: The positive impact on operating
margins and leverage for
export-oriented companies, which typically benefit from currency
depreciation, is expected to
be lower than historically observed. Fitch expects that lower
demand in the global economy,
aggressive price renegotiations, hedging of foreign-currency
exposures and the negative
impact of foreign-currency debt servicing will act to cap the
benefit to credit profiles of
companies in the pharmaceutical, technology, textile, and mining
sectors
Higher Prices Passed On: Some importers are able to pass on
higher prices from
depreciation because of import parity price (IPP) practices
prevalent in their industries, such as
companies in the oil and gas, or metals industry. Companies in
the auto ancillary sector
typically have contracts to pass on higher costs to their
original equipment manufacturers.
However, the slowdown in end-user demand may force companies in
the auto ancillary sector
to absorb some of the price increases.
Bearing the Brunt: Companies in the chemical, fertiliser or
paper industries tend to import a
significant portion of their raw materials, as do cement
manufacturers without adequate
domestic coal links. They are unlikely to be able to pass on
higher costs because of current low
demand, which will hurt margins. The credit profile for these
sectors will be, on a relative basis,
most affected by rupee depreciation.
No Direct Forex Exposure: There is no direct operational
exposure to foreign currency for 121
issuers (35% of overall debt). The potential benefit of
reduction in global commodity prices to
margins for companies in sectors including real estate, metal
processors, chemical processors
and print media will be offset to a large extent by the rupee
depreciation.
Impact on Sub-Investment Grade: The potential positive
operational impact on sub-
investment grade companies is likely to be more limited than
that of corresponding investment
grade peers in industries such as textiles, technology and
pharmaceuticals.
Worst-Hit Sector: Sub-investment grade companies in the
chemical, metal processing and
trading (in processed and unprocessed imported commodities)
industries are expected to face
lower margins, higher inventory levels and stretched working
capital. They may be the worst
casualties of the rupee depreciation, particularly if they have
limited financial flexibility.
Appreciation Unlikely: The rupee is unlikely to appreciate in
the short term until global risk
aversion subsides, according to Fitchs analysis. On the
contrary, the currency may depreciate
further if global risk aversion worsens.
Analysts
Deep N Mukherjee +91 22 4000 1721
[email protected] Muralidharan Ramakrishnan +91 22
40001732 [email protected] Sagar Desai +91 22 4000
1724 [email protected] Pragya Bansal +91 11 4356 7253
[email protected] Ashish Upadhyay +91 11 4356 7245
[email protected] Ashwini Picardo +91 22 40001787
[email protected] Tanu Sharma + 91 11 4356 7243
[email protected] N Raju +91 44 4340 1703
[email protected] Sudha Sundaram +91 44 4304 1705
[email protected] Vishal Bhawsinghka +91 33 4006 5884
[email protected]
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Corporates
Investment-Grade Corporates
July 2012 2
Fitch-Rated Indian Corporates
The primary focus of this analysis is to evaluate the impact of
rupee depreciation on the credit
profile of those investment grade companies with direct exposure
to foreign exchange risk. The
analysis evaluates the stress that these issuers will experience
if the rupee trades between
INR55/USD1 to INR60/USD1 for a sustained period of more than six
months. Fitch notes that a
temporary fall to say INR60/USD1 for a very short period is
unlikely to impair the balance sheet
strength of such investment-grade issuers.
Fitch analysed 302 issuers that are publicly rated at investment
grade (Fitch BBB-(ind) and
above) according to Fitchs national scale. The total outstanding
adjusted debt (gross debt plus
lease adjustment minus equity credit for hybrid instruments plus
preferred stock) for this group
is INR8,639bn, of which about 25% is denominated in foreign
currency, based on latest
available data.
Over 92% of the of overall adjusted debt is rated Fitch A(ind)
or above. Over 97% of the
forex debt is with companies currently rated at Fitch A-(ind) or
above. As such, these
companies are expected to weather any significant economic
downtown.
Direct Forex Exposure
The direct exposure to forex risk can be operational in nature
(due to the import of raw
materials or export revenue) or financial (foreign currency
debt). 121 of 302 issuers (having
35% of the outstanding debt) have no direct operational exposure
to forex risk.
Figure 3 Total Outstanding Debt (%) Exports as % of revenue
Imports as % of COGS Nil/insignificant 0.1 to 5.0 5.1 to 20.0
20.1 to 40
40.1 to 60.0
60.1 to 80.0
80.1 to 100
Nil/insignificant 35.0 0.1 0.4 0.0 0.0 0.0 0.4 0.1 to 5.0 0.6
0.1 0.1 0.0 0.0 0.0 0.1 5.1 to 20 6.2 3.8 0.6 0.2 0.0 0.5 0.2 20.1
to 40.0 0.1 3.9 9.1 4.6 0.2 0.6 0.0 40.1 to 60.0 5.1 3.6 7.1 0.3
0.3 0.7 0.1 60.1 to 80.0 1.6 0.0 0.0 0.0 0.0 0.0 0.0 80.1 to 100
0.9 0.0 0.3 2.4 10.6 0.1 0.0
Source: Fitch
The diagonal of the above table (yellow cells) marks companies
that either have no operational
exposure or the value of imports is comparable to exports.
However, cash flow mismatches
may still expose them to a limited amount of forex risk.
There are 15 issuers that have foreign currency debt (accounting
for 5.46% of overall forex
debt) among 121 issuers without any operational forex
exposure.
Figure 4 Total Foreign Currency Debt (%) Exports as % of
revenue
Imports as % of COGS Nil/insignificant 0.1 to 5.0 5.1 to 20.0
20.1 to 40
40.1 to 60.0
60.1 to 80.0
80.1 to 100
Nil/insignificant 5.46 0.01 0.33 0.08 0.00 0.00 0.31 0.1 to 5.0
0.31 0.00 0.00 0.00 0.00 0.01 0.18 5.1 to 20 7.84 2.52 0.70 0.03
0.00 0.24 0.09 20.1 to 40.0 0.00 3.05 14.82 1.51 0.18 0.04 0.06
40.1 to 60.0 0.02 5.21 11.22 0.08 0.37 0.98 0.08 60.1 to 80.0 0.41
0.00 0.04 0.00 0.00 0.00 0.00 80.1 to 100 2.76 0.00 0.00 1.03 40.05
0.00 0.00
Source: Fitch
Figure 1 Debt Distribution by Rating
Ratings(national scale)
Proportion of outstanding adj
debt (%)
Fitch AAA(ind) 58.76 Fitch AA+(ind) 0.28 Fitch AA(ind) 11.96
Fitch AA-(ind) 3.17 Fitch A+(ind) 1.88 Fitch A(ind) 4.57 Fitch
A-(ind) 12.19 Fitch BBB+(ind) 1.11 Fitch BBB(ind) 1.60 Fitch
BBB-(ind) 4.10 Fitch A1+(ind) 0.22 Fitch A1(ind) 0.16 Fitch
A2+(ind) 0.00
Source: Fitch
Figure 2 Forex debt distribution by Rating Ratings(national
scale)
Proportion of forex debt (%)
Fitch AAA(ind) 67.30 Fitch AA+(ind) 0.43 Fitch AA(ind) 19.09
Fitch AA-(ind) 2.30 Fitch A+(ind) 1.06 Fitch A(ind) 1.41 Fitch
A-(ind) 5.82 Fitch BBB+(ind) 0.49 Fitch BBB(ind) 0.65
FitchBBB-(ind) 1.42 Fitch A1+(ind) 0.00 Fitch A1(ind) 0.03 Fitch A3
(ind) 0.00
Source: Fitch
Related Criteria
Corporate Rating Methodology (August 2011)
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Corporates
Investment-Grade Corporates
July 2012 3
89% of foreign currency debt is held by net importers. However
within the net importers group,
90% of the foreign currency debt is held by just nine companies.
Of them the lowest rating is
Fitch A(ind) . Five of them are at Fitch AAA(ind) and three are
at Fitch AA(ind). These
issuers have significant cushion available in their respective
ratings and they are comfortably
placed to weather any financial stress on account of significant
rupee depreciation.
Impact on Debt
For companies with foreign currency debt, the rupee depreciation
will affect the amount of debt
on balance sheets in addition to higher debt servicing amount
(in rupee terms). Companies with
foreign currency loans will have debt increased by the factor in
the table below. A value of
100% means no foreign currency debt, while, for example, a value
of 101% means that debt
value has increased by 1.0% in rupee terms.
Figure 5 Impact of INR55/USD on Debt (In Percentage Point)
Adjusted for Company-Specific Exposure to Foreign Currency
Loans
Exports as % of revenue
Imports as % of COGS Nil/insignificant 0.1 to 5.0 5.1 to 20.0
20.1 to 40
40.1 to 60.0
60.1 to 80.0
80.1 to 100
Nil/insignificant 100 101 101 106 100 100 106 0.1 to 5.0 101 100
100 100 100 100 107 5.1 to 20 102 102 103 102 101 101 20.1 to 40.0
100 102 104 107 106 103 105 40.1 to 60.0 106 106 104 101 104 110
105 60.1 to 80.0 102 100 105 101 100 100 80.1 to 100 110 100 100
102 119 100 100
Source: Fitch
For net importing companies, a foreign currency loan
(particularly if it is unhedged) will
aggravate the deterioration in leverage, while for net exporters
it will limit the improvement in
credit profile.
EBITDA Impact of INR Depreciation
78 issuers (red cells in Figure 6), would have a negative
operating impact. These issuers have
proportionately higher imports as a proportion of cost of goods
sold(COGS) than revenue from
exports. However, the negative impact on EBITDA would be
mitigated for more established
players with a conservative forex hedging policy. Net importers
that are able to pass on the
rupee depreciation related cost (either by IPP or cost
pass-through contracts) would be able to
protect their margins. In fact, in rare cases where the entities
are able to fully pass on the cost
rise, the overall impact of EBITDA would be positive.
Figure 6 Impact of INR55/USD on EBITDA (In Percentage Points)
Adjusted for Pass-Through of Relevant Sectors Exports as % of
revenue
Imports as % of COGS
Nil/ insignificant 0.1 to 5.0 5.1 to 20.0 20.1 to 40
40.1 to 60.0
60.1 to 80.0
80.1 to 100
Nil/insignificant - 0.0 to 1.0 1.0 to 2.0 2.0 to 4.0 3.0 to 5.0
4.0 to 6.0 4.0 to 7.0 0.1 to 5.0 -0.5 to 0.0 0.0 1.0 to 2.0 2.0 to
4.0 3.0 to 5.0 4.0 to 6.0 4.0 to 6.0 5.1 to 20 -1.0 to -2.0 -1.0 to
-2.0 0.0 to 1.0 1.0 to 3.0 3.0 to 5.0 3.0 to 6.0 20.1 to 40.0 -2.0
to -3.5 -1.0 to -3.0 0.2 1.0 to 2.0 2.0 to 3.0 2.0 to 4.0 2.0 to
4.0 40.1 to 60.0 -2.5 to -4.0 -0.0 to -4.0 -1.0 to -3.0 0.0 to 1.0
1.0 to 2.0 1.0 to3.0 2.0 to 4.0 60.1 to 80.0 -0.0 to -4.0 -2.0 to
-4.0 -1.0 to -4.0 -1.0 to -3.0 0.0 2.0 to 4.0 80.1 to 100 -4.0 to
-6.0 -4.0 to -6.0 1.0 to -4.0 -1.0 to -3.0 0.0 to -1.0 0 to 1.0 2.0
to 4.0
Source: Fitch
Net exporters (cells in blue in Figure 6) would expect
significant margin improvement.
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Corporates
Investment-Grade Corporates
July 2012 4
Sector-Wise Credit Impact
The section of report focuses on the impact of on credits from a
rupee depreciation on sectors
where the impact (both positive and negative) is pronounced.
These sectors are not only core
to the economy but also have significant representation in
Fitchs investment grade national
rating universe.
These sectors form four groups:
Net exporters (pharmaceuticals, technology, mining and
textiles)
Net importers with ways to mitigate depreciation (auto
ancillary, oil and gas, metals)
Net importers without ways to mitigate depreciation (chemical,
paper, cement)
Business model-driven exposure.
Figure 7
0
20
40
60
80
100
No
n-f
err
ou
s
Pha
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Min
ing
Tech
no
log
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Textile
Auto
& r
ela
ted
Div
ers
ifie
dm
an
ufa
ctu
ring
Div
ers
ifie
dse
rvic
es
F&
B
Build
ing
ma
terials
& c
onstr
uction
Oil
and
gas
Ste
el
Ca
pita
l go
od
s
Pap
er
& p
ape
rpro
ducts
Ch
em
icals
Ce
me
nt
Positive Neutral Negative
Impact by Industry(Proportion of total companies in the
sector)
(%)
Source: Fitch
In the first three groups, most companies should show the
specific trait (such as net exporter,
net importer) which is typical to the group. However, the impact
from rupee depreciation would
vary across companies within the same sector. They would be
determined by company-specific
policies regarding foreign currency hedging, foreign currency
loans or sourcing strategy as well
as contractual obligations/renegotiation of prices with
customers. In certain cases, the impact of
rupee depreciation may be completely opposite in comparison to
the sector it operates
because of its specific business model.
Net Exporters
This sector consists of either pure exporters (cotton textile,
technology and mining) or
companies where exports are much higher than imports (synthetic
textile,pharmaceuticals and
jewellery). Historical data suggests that rupee depreciation may
be an enabling factor but need
not be a driving factor for export growth.
Figure 8
-15
-10
-5
0
5
10
15
20
-40
-20
0
20
40
60
80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Indian export growth (LHS) Invisibles (LHS) Rupee depreciation
(RHS)(YoY %)
Limited Impact Rupee Depreciation and Indian Export Growth
Source: RBI, FItch
(%)
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Corporates
Investment-Grade Corporates
July 2012 5
Exports (in dollar terms) from India grew at rates higher than
20% (yoy) from 2003 to 2008.
This period also coincided with historically high global GDP
growth levels (in excess of 4.8%)
not observed since 1980 and correspondingly high global trade
volumes. However over most of
the period the rupee appreciated against the dollar.
Thus while rupee depreciation would have a positive impact on
majority of companies in these
sectors, a fall in global demand from historical levels may
significantly limit the degree of the
positive impact. Additionally, aggressive price negotiation from
corporate clients of such
exporters may potentially further limit the benefits.
Figure 9
-1
0
1
2
3
4
5
6
-15
-10
-5
0
5
10
15
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Global trade volume of goods and services (LHS)
Global GDP (%) constant prices (RHS)(YoY %)
Global Trade and GDP Growth
Source: IMF
(GDP %)
More established players in pharmaceuticals and technology,
which typically hedge in excess
of 40% of their foreign currency exposure, may have a limited
upside to credit profiles. Debt
servicing of foreign currency loans by a significant number of
pharmaceutical and textile
companies is expected to limit improvement of credit
profiles.
Pharmaceuticals
Of the 11 pharmaceutical companies rated investment grade, 10
are directly exposed to foreign
currency risk. In nine companies, the rupee depreciation is
expected to have a positive impact.
The export data pertinent to this sector tend to suggest that
global demand has a higher impact
on export volumes than the rupee exchange rate.
Figure 10
0
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(%)
Source: RBI, FItch
Basic Chemicals, Pharmaceuticals, Cosmetics Export from
India
Among Fitch-rated entities, companies that have net export
surpluses and could see magin
benefits from the rupee depreciation are Aurobindo Pharma Ltd,
Claris Lifesciences Limited,
Nectar Lifesciences Limited, Jubilant Life Sciences Limited and
Arch Pharmalabs Limited.
However, the cash flow benefits for Aurobindo Pharma would be
limited by its significant
foreign currency debt. Nonetheless, the rating headroom is
expected to broadly remain
sufficient for most the Fitch-rated pharmaceutical entities if
the exchange rate remains at
Rating headroom refers to the cushion
with respect to relevant rating metrics
(calculated at INR55/USD1) in
comparison to the negative rating
trigger.
Low: 10% and lower; Sufficient: 25% to
10%; Comfortable: above 25%
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Corporates
Investment-Grade Corporates
July 2012 6
INR55/USD1 to INR60/USD1 for a sustained period. Fitch also
notes that pharmaceutical
companies with a diverse geographical presence are also exposed
to currencies other than the
dollar and other forex volatility could impact operating margins
as well as leverage.
Technology
The impact of forex depreciation will be nominal for four of 13
technology companies rated by
Fitch. Details of the remaining nine are provided below:
Better-established software companies tend to hedge a higher
proportion of their forex
exposure than relatively smaller players. Those companies that
expose a higher proportion of
their cash flows to forex risk would temporarily enjoy higher
margins, though the long-term risk
profile may not improve given the inherent higher
volatility.
HCL Infosystems Limited is the only company in this group which
may have a negative impact
on margins. The company imports significant proportion of its
components, while it has
Figure 11 Pharmaceuticals
Company Subsector Rating Outlook Margin impact at INR55/USD1
(%)
Rating headroom (at INR55/USD1)
Rating headroom (at INR60/USD1)
Foreign currency debt as % of total
debt
Aurobindo Pharma Ltd Pharmaceuticals Fitch AA(ind) Stable 2 to 3
Sufficient Sufficient 40 to 50 Jubilant Life Sciences Limited
Pharma - CRAMS, API, Formulations
Fitch A+(ind) Stable 4 to 6 Sufficient Comfortable 10.1 to
20.0
Nectar Lifesciences Limited
Pharma - API, Phytichemicals, Formulations
Fitch A(ind) Stable 2 to 3 Sufficient Sufficient 10.1 to
20.0
Claris Lifesciences Limited
Pharma - Formulations (Injectibles)
Fitch A(ind) Stable 2 to 3 Sufficient Sufficient 10.1 to
20.0
Himalaya Drug Company
Pharma - Others Fitch A(ind) Stable 2 to 3 Comfortable
Comfortable -
Gland Pharma Limited Pharma - Formulations (Injectibles &
pre-filled syringes)
Fitch A(ind) Stable 1 to 2 Sufficient Sufficient -
Vasudha Pharma Chem Limited
Pharma - API Fitch BBB+(ind) Stable 4 to 6 Sufficient
Comfortable -
Fresenius Kabi India Private Ltd
Pharma Formulations
Fitch BBB(ind) Stable -5 Sufficient, linked to stronger
parent
Sufficient, linked to stronger parent
10.1 to 20.0
Strides Arcolab Limited Pharma Formulations
Fitch BBB(ind) Stable 4 to 6 Sufficient Sufficient 30-35
Arch Pharmalabs Limited
Pharma - API, CRAMS Fitch A1(ind) - 0 to 1 Sufficient Sufficient
0.0 to 10.1
Source: Fitch, issuers annual reports
Figure 12 Technology
Company Sub-sector Rating Outlook
Margin impact at
INR55/USD1 (%)
Rating headroom
(at INR55/USD1) Rating headroom (at INR60/USD1)
Forex debt as proportion of total debt (%)
IBM India Pvt. Ltd Software Fitch AAA(ind) Stable n.a.
Comfortable, stronger parental linkage
Comfortable, stronger parental linkage
0
MindTree Limited Software Fitch AA(ind) Negative 3.0 to 5.0 Low
Sufficient 0 Infinite Computer Solutions (India) Ltd
ITES Fitch AA(ind) Stable 1.0 to 2.0 Sufficient Sufficient 0
HCL Infosystems c Hardware Fitch AA(ind) Negative -1.5 to 2.5
Low Low 0 Space Matrix Limited ITES Fitch A(ind) Stable 4.0 to 6.0
Sufficient Comfortable 0 Semantic Space Technologies Limited
Software Fitch A(ind) Stable 4.0 to 6.0 Sufficient Comfortable
0
Megasoft Ltd. Software Fitch BBB(ind) Negative 3.0 to 5.0 Low
Sufficient 70 Ninestars Information Technologies Limited
ITES Fitch BBB(ind) Stable 4.0 to 6.0 Sufficient Comfortable
0
IBS Software Services Private Limited
Software Fitch BBB(ind) Stable 3.0 to 5.0 Sufficient Sufficient
8
Source: Fitch, issuers annual reports
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Corporates
Investment-Grade Corporates
July 2012 7
significant fixed cost contacts for systems integration and
computing. However, the company
has been trying to convert dollar-denominated purchases into
rupee-denominated buying.
ITES segment has exhibited relatively higher margin expansion
with respect to rupee
depreciation than pure software players. The sector may benefit
against competitors from
countries such as the Philippines whose currency has appreciated
relative to the rupee (see
Appendix 1).
Mining (Iron Ore)
Fitchs portfolio of mining companies mainly comprises iron ore
miners. These companies
derive about half of their revenues from exports. Of the six
companies in this sector, which are
rated in investment grade, five are directly impacted by rupee
depreciation.
Figure 13 Mining (Iron Ore)
Company Rating Outlook
Margin impact at
INR55/USD1 (%)
Rating headroom (at INR55//USD1)
Rating headroom (at INR60/USD1)
Forex debt as
proportion of total debt
Rungta Mines Ltd. Fitch AA(ind)
Stable 2.0 to 4.0 Comfortable Comfortable -
Rungta Sons Pvt Ltd Fitch AA(ind)
Stable 3.0 to 5.0 Comfortable Comfortable -
Feegrade & Company Private Limited
Fitch AA(ind)
Stable 2.0 to 4.0 Comfortable Comfortable -
Bonai Industrial Company Limited
Fitch AA(ind)
Stable 3.0 to 5.0 Comfortable Comfortable -
Mangilall Rungta Fitch A(ind)
Stable 2.0 to 4.0 Comfortable Comfortable -
Source: Fitch, issuers annual reports
These companies typically do not extensively hedge their foreign
currency exposure. The price
of iron ore fines (63% Fe content) have fallen by over 20% to
about USD140 per tonne as of
May 2012 from USD180 levels as of September 2011.
Policy changes, such as the increase in export duty to 30% from
20% from December 2011,
also have an impact on their export competitiveness. Therefore,
the companies are
increasingly focussing on domestic markets. Given the falling
global commodity prices and the
reduction in export competitiveness, these companies would be
able to get limited benefit from
rupee depreciation. These companies do not have foreign currency
loans. Overall the credit
profile may marginally improve due to rupee depreciation.
Textiles
The rupee depreciation would have a overall positive impact on
the texitle sector. Howver, the
degree of positive impact will be more limited than observed
historically given the muted
demand in customer countries. Historically export volumes for
segments such as cotton
yarn/fabric and synthetic yarn/fabric have benefitted the most
from rupee depreciation. The
export volumes of ready-made garments had limited benefit of
rupee depreciation in the past.
Incremental volume growth may not be expected, particularly in
cotton textile (as it is relatively
less affordable than synthetics) and ready-made garments.
Additionally, the extent of margin benefit may be muted for more
well established players who
tend to hedge substantial portion of forex exposure. For
instance, Bhartiya International Limited
(Fitch A(ind)/Stable) hedges up to 70% of its forex exposure.
For Orient Fashions Exports
Private Limited (Fitch BBB(ind)/Stable), the forex gain has been
negated by forward hedge
positions at a lower-than-prevailing USD/INR exchange rate.
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Corporates
Investment-Grade Corporates
July 2012 8
Figure 14
-15
-10
-5
0
5
10
15
20
25
-12
-6
0
6
12
18
24
30
36
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Global GDP constant prices (RHS) Rupee depreciation (RHS)Cotton
yarn, fabrics (LHS) ManMade yarn, fabrics (LHS)Readymade garments
(LHS)
(%)
Textile Exports Growth (USD Value Terms) in realtion to Global
GDP and USD/ INR Exchange rate
% change in INR/USD. Negative value indicate INR appreciation
against USDSource: RBI and Fitch
(%)
a
a
Indian textile exporters may enjoy increased competitiveness as
the rupee has on a relative
basis depreciated against competing nations such as China and
Bangladesh. However, large
institutional buyers may renegotiate prices or demand for
discounts. In some cases they may
demand a rupee quote as opposed to the usual practise of a
dollar quote. Of the 12 companies
in this sector, which are rated in investment grade, in four
companies the direct impact of
foreign currency depreciation will be insignificant. The details
of the remaining eight issuers are
provided in Figure 15.
Figure 15 Textiles
Company Sector Rating Outlook
Margin impact at
INR55/USD (%)
Rating headroom (at INR55/USD1)
Rating headroom (at INR60/USD1)
Foreign currency
debt as % of total debt
Rupa & Company Limited
Textiles - Hosiery
Fitch A(ind)
Stable 0.0 to 1.0 Comfortable Sufficient 10.1 to 20.0
Welspun Global Brands Limited
Textiles - Home Textiles
Fitch A(ind)
Negative 4.0 to 6.0 Sufficient Sufficient 0.1 to 10.0
Bhartiya International Limited
Textile - Leather Garments
Fitch A(ind)
Stable 4.0 to 6.0 Sufficient Sufficient -
Eastman Exports Global Clothing (P) Ltd
Textiles - Garments
Fitch A(ind)
Stable 4.0 to 6.0 Sufficient Sufficient 60.0 to 70.0
Balkrishna Synthetics Ltd
Textiles - Processing
Fitch BBB(ind)
Negative 0.0 to -1.0 Low Low -
Dattatreya Textiles Pvt Ltd
Textiles - Yarn
Fitch BBB(ind)
Stable 1.0 to 2.0 Sufficient Sufficient -
Sundaram Textiles Limited
Textiles - Yarn
Fitch BBB(ind)
Stable 2.0 to 3.0 Sufficient Sufficient -
Orient Fashion Exports Private Limited
Textiles - Garments
Fitch BBB(ind)
Stable 4.0 to 6.0 Sufficient Sufficient -
Source: Fitch, issuers annual reports
Gems and Jewellery
In Fitchs investment grade universe there are two companies in
the gems and jewellery sector.
Suashish Diamonds Limited (Fitch BBB/Stable) is an exporter and
would likely be positively
affected operationally. BC Sen & Company Limited is a
domestic jewellery retailer. Most gem
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Corporates
Investment-Grade Corporates
July 2012 9
and jewellery exporters are expected to have a benefit
operationally. However a lot of such
exporters were thus far generating significant other income
because of the low US dollar Libor
rate, a high domestic fixed-deposit rate and favourable
dollar/rupee forward rates. This income
was often 12% to 15% of the PBT of such companies. However, this
profit opportunity is likely
to diminish given the reduction in domestic deposit rate and a
rise in dollar /rupee forward
rates. Thus the observable incremental benefit to margins (due
to rupee depreciation) may
actually be negated in case of some companies.
Importers With Ways to Mitigate Depreciation
This group essentially consists of industries that are net
importers. They are usually able to
pass on cost hikes from the rupee depreciation either due to IPP
norms followed in the industry
(eg oil and gas, steel and non-ferrous metals). However, there
are sectors such as auto
ancillary where the cost rise is passed on to the original
equipment manufacturer (OEM) as per
contract.
Auto and Related
Of the 29 investment grade companies in this sector, for three
companies the direct impact of
foreign currency depreciation will be insignificant. The details
of 26 issuers are provided below:
Fitch-rated auto suppliers are likely to remain largely
unaffected by current or even sharper
rupee depreciation. Within this sector there is a subsector of
companies which would clearly
benefit from export revenue ( assuming stable demand in their
export market) while the other
subsector would consist of companies that are net importers but
would be able to pass through
to the OEM a significant portion of the price rise due to rupee
depreciation.
Figure 16 Auto and Related
Company Rating Outlook Margin impact at INR55/USD1 (%)
Rating headroom (at INR55/USD1)
Rating headroom (at INR60/USD1)
Forex debt as proportion of total
debt (%)
WABCO India Limited Fitch AA+(ind) Stable 0.0 to 2.0 Comfortable
Comfortable 0 Satyam Auto Components Limited Fitch AA(ind) Stable
-1.0 to 0.0 Comfortable Comfortable 0.1 to 10.0 Ashok Leyland Ltd.
Fitch AA(ind) Stable 0.0 to 1.0 Sufficient Sufficient 50 to 60
Shriram Pistons and Rings Limited Fitch AA(ind) Stable 0.0 to 1.0
Comfortable Comfortable 0 Tata Marcopolo Motors Ltd Fitch A(ind)
Stable -1.0 to 0.0 Sufficient Sufficient 0 Hi-Tech Gear Limited
Fitch A(ind) Stable 1 to 3 Sufficient Sufficient 10 to 20 Steel
Strips Wheels Limited Fitch A(ind) Stable Insignificant Low Low 0
Unitech Machines Limited Fitch A(ind) Negative 0.0 to 1.0 Low Low 0
Sterling Tools Limited Fitch A(ind) Stable -1.0 to 0.0 Sufficient
Sufficient 0 TVS Srichakra Limited Fitch A(ind) Stable 0.0 to 1.0
Sufficient Sufficient 0 Sandhar Technologies Limited Fitch A(ind)
Stable -1.0 to 0.0 Comfortable Sufficient 0.1 to 10.0 Minda SAI
Limited Fitch BBB+(ind) Stable -1.0 to 0.0 Sufficient-linked to
parent Sufficient, linked to parent
0
Talbros Automotive Components Limited
Fitch BBB+(ind) Stable 0.0 to 1.0 Sufficient Sufficient 0
Imperial Auto Industries Limited Fitch BBB+(ind) Positive 0.0 to
1.0 Comfortable Comfortable 0 Minda Corporation Fitch BBB+(ind)
Stable 0.0 to 2.0 Comfortable Comfortable 50 to 60 QH Talbros
Limited Fitch BBB(ind) Positive 1 to 3 Sufficient Sufficient 0
Lifelong Meditech Limited Fitch BBB(SO)(ind) - 3 to 5
Sufficient-linked to
parent Sufficient, linked to parent
20 to 30
Deltronix India Limited Fitch BBB(ind) Stable -1.0 to 0.0
Sufficient Low 0 Indo Farm Equipment Limited Fitch BBB(ind) Stable
0.0 to 1.0 Sufficient Sufficient 0 Pooja Forge Limited Fitch
BBB(ind) Stable 0.0 to 1.0 Sufficient Sufficient 10 to 20 Emitec
Emission Control Technologies Private Limited
Fitch BBB(ind) Stable - 2.0 to -4.0 Sufficient Low 0
Lifelong India Limited Fitch BBB(ind) Stable 0.0 to 1.0
Sufficient Sufficient 30 to 40 Motherson Advanced Tooling Solutions
Limited
Fitch BBB(ind) Negative Insignificant Low Low 0
Punch Ratna Fasteners Pvt Ltd Fitch BBB(ind) Stable - 2.0 to
-4.0 Sufficient Low 0 Jubilant Motorworks Pvt Ltd Fitch BBB(ind)
Stable 0.0 to 1.0 Sufficient-linked to
parent Sufficient, linked to parent
0
Tulsi Castings and Machining Limited
Fitch BBB(ind) Stable 0.0 to 2.0 Low Low 30 to 40
Source: Fitch, issuers annual reports
-
Corporates
Investment-Grade Corporates
July 2012 10
Net exporters such as QH Talbros Limited, Ashok Leyland Ltd.,
Hi-Tech Gears Limited, Minda
Corporation Limited and Beri Udyog Private Limited are expected
to be positively impacted in
terms of operating cash flow.
The second subcategory of companies has historically been able
to pass on the cost rise to the
OEM. However Fitch believes that the auto OEMs currently
experiencing lower demand would
be resistant to the past practise. Fitch believes that these
price rises would be shared through
the entire auto supply chain. Thus the benefits of rupee
depreciation on this sub-category of
auto ancillary companies margin would be lower than would have
been expected from historical
observations.
The auto and related sector has a relatively higher proportion
of companies having a hedging
strategy. Within the 29 companies in this sector, 18 have a
consistent forex hedging strategy,
where on an average 40% to 60% of the foreign currency exposure
is hedged. This is expected
to moderate the impact of rupee depreciation.
Negative impact on operating margins may be expected on
companies including Punch Ratna
Fasteners Pvt Ltd, Sterling Tools Limited and Deltronix India,
which have significant imports.
However, the rating headroom is sufficient in most
instances.
Fitch notes that the Indian subsidiaries and joint ventures of
global suppliers would be worst hit
owing to very high dependence on parents for input materials and
components. Emitec
Emission Control Technologies Private Limited is one such
example.
On a positive note, Fitch could see stepping up of efforts to
localise some of these imported
input materials as well as the components by OEMs, which would
benefit the domestic auto
suppliers in the medium term.
-
Corporates
Investment-Grade Corporates
July 2012 11
Oil and Gas
Of the 14 investment grade companies in this sector, for 10
companies the direct impact of
foreign currency depreciation will be insignificant. The details
of the remaining four issuers are
provided below:
Figure 17 Oil and Gas
Company Rating Outlook
Margin impact at
INR55/USD (%)
Rating headroom (at INR55/USD1)
Rating headroom (at INR60/USD1)
Forex debt as proportion of total debt (%)
Indian Oil Corporation Ltd (IOC)
Fitch AAA(ind) Stable Linked to Sovereign
Linked to Sovereign
38
Hindustan Petroleum CorporationLtd (HPCL)
Fitch AAA(ind) Stable Linked to Sovereign
Linked to Sovereign
19
Reliance Industies Ltd (RIL)
Fitch AAA(ind) Stable 0.0 to-1.0 Comfortable Comfortable 90
Petronet LNG Ltd
Fitch AA(ind) Stable 0.0 to-1.0 Comfortable Comfortable 50
Essar Oil Ltd
Fitch BBB(ind) Stable -1.0 to-3.0 Low Low 10
The public sector oil marketing companies are compensated by
government for such under-recoveries losses that arise by selling
the products at lower than market determined prices. Such
compensation mechanism is ad-hoc and is difficult to analytically
project. Source: Fitch, issuers annual reports
The impact of INR depreciation on Fitch rated oil and gas
companies can differ across public
sector entities (PSE) such as IOC, HPCL and private refiners
like RIL and Essar Oil Ltd .
Private refiners that import the bulk of their raw material
could see their operating profitability
fall in the range of 1% to 3% if an exchange rate of INR55/USD
persists. Exports for RIL (50%-
60% of revenue) and Essar Oil (20%-40% of revenue ) can only
provide limited mitigation.
Though these companies export a large part of their refined
petroleum products, the prices of
many of these crude derivative or petrochemicals is determined
by the demand-supply situation
of end-products. This makes the pass-through of high input
prices difficult.
Forex borrowings for most of Fitch-rated oil and gas companies
are low (0-20% for Essar,
HPCL) to moderate (20%-50% for IOC, Petronet) except for
Reliance, which has about 90% of
its borrowing denominated in forex. Since public sector
enterprises are rated based on their
strong linkages with government of India, Fitch does not expect
their ratings to be impacted by
currency movements. Reliances credit metrics could be weakened
because of its significant
forex borrowings and the likely impact of a rupee depreciation
on its operating profitability.
However it is still likely to remain very comfortable for its
rating level.
On the contrary, the impact of sustained rupee depreciation on
Essar Oils operating
profitability and financial leverage despite low forex
borrowings could stretch its credit
metrics beyond the agencys comfort level.
Metals
Globally, the price has fallen for ferrous and key non-ferrous
metals over the last 12 months
(steel about 14%, aluminium 25%, copper 19%). However, due to
IPP and rupee depreciation
the prices in Indian market have remained broadly unchanged from
levels seen a year ago.
Thus operating margins of Indian metal producers are expected to
get substantial support from
the rupee depreciation against global fall in metal prices. The
extent of a benefit would depend
on degree of backward integration (with respect to ore mines and
links to coal mines), with
more integrated players likely to receive a higher benefit. This
industry has high dependence
on imported coal/coke, and would be to the same extent,
adversely affected by rupee
depreciation.
-
Corporates
Investment-Grade Corporates
July 2012 12
Ferrous - Primary Steel Producers
Among Fitch rated Primary Steel producers Tata Steel Ltd (TSL)
and Steel Authority of India
Ltd (SAIL), which have relatively higher levels of vertical
integration, are expected to receive
more cushion from the rupee depreciation against a fall in
margins. However, players with
limited or no vertical integration (such as RINL) would be more
adversely affected. Not only do
these companies have to import coke but the iron ore from
domestic market would be more
expensive by 10%, given the hike of iron ore by NMDC Ltd,
India's largest iron ore miner.
Figure 18 Ferrous - Primary Steel Producers
Company Rating Outlook
Margin impact at INR55/USD
(%)
Rating headroom (at INR55/USD1)
Rating headroom (at INR60/USD1)
Forex debt as
proportion of total
debt (%)
Steel Authority Of India Limited
Fitch AAA(ind)
Stable 0 to -1.5 Sufficient, linked to sovereign
Sufficient, linked to sovereign
28
Rashtriya Ispat Nigam Limited (RINL)
Fitch AA(ind) Stable -1.0 to -3.0 Low Low 17
Tata Steel Limited (TSL)
Fitch AA(ind) Stable 0.0 to -1.0 Sufficient Low 4
Bhushan Power and Steel Limited (BPSL)
Fitch A(ind) Stable 0.0 to 1.0 Low Low 4
Source: Fitch, issuers annual reports
Fitch believes the ability of steel producers to increase prices
is limited because of the current
weak end-user demand. Foreign currency loans will also result in
higher financing charges and
lower net profits. However in most cases the rating is unlikely
to be affected given the sufficient
rating headroom. The exception is BPSL. Its export business is
expected to have a positive
impact on margin. However BPSL has low rating headroom given its
existing high leverage on
account of its capacity expansion.
Alloy/Specialty Steel and Steel Products
Alloy/speciality steel producers using electric arc furnace for
steel making are largely
dependent on steel scrap (mostly imported) for their operations.
Global scrap prices have
softened by 6% as of end-May 2012 (from end-March 2012) as
against a steeper fall of 10% in
the USD/INR rate during the same period. Such companies usually
enjoy some sourcing
flexibility as scrap iron may (to an extent) be replaced by
sponge iron. However, their sourcing
flexibility may be limited because of the disruption in
operations of many small sponge iron
companies located around Karnataka and Goa due to problems
relating to iron ore mining.
Figure 19 Alloy/Specialty Steel and Steel Products
Company Rating Outlook
Margin impact at
INR55/USD (%)
Rating headroom at INR55/USD1
Rating headroom at INR60/USD1
Forex debt as
proportion of total debt (%)
Usha Martin Limited
Fitch A+(ind) Stable 0 to -1.0 Low Low 44
Mahindra Ugine Steel Company Ltd (MUSCO)
Fitch BBB+(ind) Rating Watch Evolving
-1.0 to -3.0 Under review Under review
0
Adhunik Metaliks Limited
Fitch BBB(ind) Stable 0 to -1.0 Sufficient Sufficient 0
Source: Fitch, issuers annual reports
Fitch notes that the profitability of Usha Martin (significant
vertical integration with captive iron
ore and coal) and Adhunik Metaliks (limited vertical integration
with captive iron ores) would
experience limited negative impact on the operating margins as
opposed to MUSCO (no
-
Corporates
Investment-Grade Corporates
July 2012 13
vertical integration). In the event of sustained rupee
depreciation at levels of INR55/USD and
above the credit profile of MUSCO and Usha Martin (44% of debt
in foreign currency) may
experience pressure on their credit profile.
Steel Processors/Converters
Steel processing companies (such as Uttam Galva Steels Limited)
primarily are source hot
rolled coils and produce value added products. The prices of the
value added products are
linked to prices of hot rolled coils. Fitch notes that the
pressure on profitability is likely on
account of the limited ability to pass on higher costs due to
subdued demand from end-user
industries. These companies have low amount of forex debt so the
impact on their capital
structure will be limited.
Figure 20 Steel Processors/Converters
Company Rating Outlook
Margin impact at
INR55/USD (%)
Rating headroom at INR55/USD1
Rating headroom at INR60/USD1
Forex debt as proportion of total debt (%)
Uttam Galva Steels Limited
Fitch A(ind) Stable 0.0 to 0.5 Low Low 7
Source: Fitch,Issuer Annaul report
Non-Ferrous Aluminium
The depreciation of rupee against the dollar has largely helped
Indian primary producers of
aluminium during the last couple of months. In absence of rupee
depreciation, the marginal
cost of production would have been close to the market price for
non-integrated producers such
as Vedanta Aluminium Ltd. Fitch believes the rupee depreciation
would alleviate the pressure
on profitability to a certain extent.
Figure 21
20
40
60
80
100
120
140
1,000
1,500
2,000
2,500
3,000
3,500
Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun
12
LME Al (LHS) MCX aluminium (INR/kg) (RHS) USD/INR
(RHS)(USD/ton)
Indian Aluminium PricesIn relation to global prices and USD/
INR
Source: Fitch
Figure 22 Non-Ferrous Aluminium
Company Rating Outlook
Margin impact at
INR55/USD (%)
Rating headroom at INR55/USD1
Rating headroom at INR60/USD1
Forex debt as proportion of total debt (%)
Vedanta Aluminium Ltd (VAL)
Fitch A(ind) Rating Watch Positive
0.0 to -1.0 Comfortable, with parental linkage
Comfortable, with parental linkage
5
Source: Fitch, issuers annual reports
Fitch notes further reduction of global aluminium prices and
lowering of domestic demand may
put pressure on the profitability of such companies.
-
Corporates
Investment-Grade Corporates
July 2012 14
Non-Ferrous - Copper
Most Indian copper producers are custom smelters and import a
significant part of copper
concentrate. Thus these companies are more impacted by the
volatility in tc/rc (treatment and
refining) margins and prices of by-products. The spot tc/rc
margins for copper companies have
declined during H2FY12. Consequently the depreciation of the
rupee may to some extent
mitigate the pressure on profitability on account of lower tc/rc
margins.
Figure 23
20
30
40
50
60
70
80
90
100
1,0002,0003,0004,0005,0006,0007,0008,0009,000
10,00011,000
Jun 08 Nov 08 May 09 Oct 09 Mar 10 Aug 10 Feb 11 Jul 11 Dec 11
Jun 12
LME Copper (USD/ton) (LHS) INR prices/10 KG (LHS) USD/INR
(RHS)
Indian Copper PricesIn relation to global prices and USD/
INR
Source: Fitch
However, the fall in the rupee will also result in these
companies dependent on imported coal
not being able to benefit from the falling global thermal coal
prices. The same is similar for
silver, one of the by-products, to a certain extent.
Consequently Fitch believes that operating
profitability of copper companies is likely to be under marginal
pressure on account of forex, but
it may not result in significant negative impact on their credit
quality. Fitch notes that in case of
Sterlite Industries India Ltd, the increase in debt levels
because of rupee depreciations will not
impact the credit profile given the negative net debt position
of the company.
Importers Without Ways to Mitigate Depreciation
This group essentially consists companies, where the cost rise
due to imported goods may not
be directly passed on the customers. At best, the fertiliser
sector would expect compensation in
the form of subsidies from government but there is typically a
lag in getting subsidies.
Fertiliser
All four Fitch-rated investment-grade fertiliser companies will
feel the impact of the rupee
depreciation.
Figure 24 Fertiliser
Company Rating Outlook
Margin impact at
INR55/USD (%)
Rating headroom (at INR55/USD)
Rating headroom (at INR60/USD)
Forex debt as proportion of total debt (%)
Gujarat State Fertilisers & Chemicals Limited (GSFC)
Fitch AA+(ind)
Stable -1.0 to -3.0 Comfortable Sufficient 0
Coromandel International Ltd (CIL)
Fitch AA+(ind)
Stable -2.0 to -4.0 Low Low 48
Tata Chemicals Limited (TCL)
Fitch AA(ind)
Stable 0 to -1.0 Low Low 76
Indian Farmers Fertiliser Cooperative Limited (IFFCO)
Fitch AA(ind)
Stable -1.0 to -3.0 Low Low 0
Source: Fitch, issuers annual reports
-
Corporates
Investment-Grade Corporates
July 2012 15
India typically imports more than 70% of its non-urea
fertiliser. Producers of non-urea fertiliser
(such as, di-ammonium phosphate (DAP), nitogen, phosphorous and
potassium (NPK) based
fertilisers) have the flexibility to raise prices and are
currently evaluating price rises in response
to rupee depreciation. The government, however, in April
announced it is cutting its non-urea
subsidy by 27%. This will increase the price differential with
urea, (whose price is regulated by
government) so farmers may instead shift to using urea. This
would be to the detriment of the
non-urea-based fertiliser companies. Thus the benefits of a
price rise in response to rupee
depreciation may not be fully realised.
The four companies (TCL, GSFC, CIL, IFFCO) draw significant
revenue from non-subsidy
products and non-fertiliser products, which would cushion the
margin squeeze. While the
margins are expected to be affected, the credit profile of TCL,
IFFCO,GSFC are unlikely to be
stressed further if the rupee remains around the current levels
of INR55/USD to INR56/USD for
a sustained period. However, a sustained rate of INR60/USD
coupled with deterioration in
ability to pass on the cost rise may deteriorate the credit
profile.
Chemicals
Of the 10 companies in the chemical industry that are rated at
investment grade by Fitch,
seven will be negatively impacted while three will be positively
impacted. Chemical companies
typically do not enjoy any shield such as import parity pricing
or cost pass-through contracts
with customers. Given the slowdown in industrial demand for
chemicals, even limited cost-pass
through may further deteriorate demand. Some chemical companies
might be saddled with
large high-value inventory but with limited ability to pass on
the cost.
Figure 25 Chemical
Company Rating Outlook Margin impact at
INR55/USD (%) Rating headroom (at INR55/USD)
Rating headroom (at INR60/USD)
Forex debt as proportion of total debt (%)
Supreme Petrochem Ltd. Fitch A(ind) Stable -1.0 to -3.0 Low Low
3 National Peroxide Limited Fitch A(ind) Stable 0 to -1.0
Sufficient Sufficient 0 JBF Industries Limited Fitch A(ind) Stable
0.0 to 1.0 Sufficient Sufficient 19 DCW Ltd. Fitch A-(ind) Stable
-2.0 to- 4.0 Sufficient Low 23 Kalpena Industries Limited
Fitch A(ind) Stable 0 to -1.0 Low Low 31
Visen Industries Limited Fitch A(ind) Stable -2.0 to -4.0 Low
Low 60 Balaji Amines Limited Fitch A(ind) Stable 0.0 to 1.0
Sufficient Sufficient 0 Sah Petroleums Limited Fitch BBB+(ind)
Stable -2.0 to -4.0 Low Low 0 India Glycols Limited Fitch BBB+(ind)
Positive 0.0 to 1.0 Comfortable Comfortable 40 Chemplast Sanmar
Ltd. Fitch BBB(ind) Stable -3.0 to -5.0 Low Low 0
Source: Fitch, issuers annual reports
-
Corporates
Investment-Grade Corporates
July 2012 16
Paper
The profitability of Indian paper manufacturers has been
negatively impacted in financial year
ending March 2012 (FY12) and the slide is expected to continue
for the next few quarters of
FY13. The depreciation of rupee is partly responsible for this
fall in profitability as a significant
part of input requirements is met through imports (pulp and
coal). This ranges from about 30%
in case of Ballarpur Industries to about 15%-20% for JK Paper
and NR Agrawal. And even for
companies that do not import pulp, the domestic prices of pulp
and other alternative materials
(such as waste paper) are linked to import parity prices, so are
indirectly impacted by
unfavourable currency movements. Fitch estimates that the
operating profitability of its rated
paper companies can decline as much as 2%-4% if the current
INR/USD exchange rate
persists for the entire year. Apart from the direct impact of
exchange movements, the operating
profitability could get stressed due to lower selling prices.
This seems a near-term possibility
due to anticipated overcapacity.
The combined effect of currency movements and the industry
scenario of anticipated over
capacity would likely lead to stretching of the credit metrics
of many rated paper companies.
Further, due to dollar-denominated borrowings, the credit
metrics of the companies such as NR
Agrawal and Ballarpur Industries, could stretch beyond the
agencys comfort levels.
Figure 26 Paper
Company Rating Outlook Margin impact at INR55/USD) (%)
Rating headroom (at INR55/USD1)
Rating headroom (at INR60/USD1)
Forex debt as proportion of total
debt (%)
Ballarpur Industries Limited
Fitch AA(ind) Stable -1.0 to -3.0 Low Low 40.0 to 50.0
BILT Graphic Paper Products Limited
Fitch AA(ind) Stable 0.0 to -1.0 Low Low -
The Mysore Paper Mills Ltd
Fitch AA(ind) (SO)(EXP)
Stable 0.0 to -1.0 Sufficient, linked to government of
Karnataka
Sufficient, linked to government of Karnataka
-
JK Paper Limited Fitch A(ind) Stable -2.0 to -3.0 Comfortable
Comfortable 20.0 to 30.0 Shree Shyam Pulp and Board Mills
Limited
Fitch BBB+(ind) Negative 0.0 to -1.0 Low Low -
Sripathi Paper and Boards Private Limited
Fitch BBB(ind) Negative -2.0 to -3.0 Low Low -
NR Agarwal Industries Ltd
Fitch BBB(ind) Negative -1.0 to -2.0 Low Low 10.1 to 20.0
Nithya Packaging Private Limited
Fitch BBB(ind) Stable -1.0 to -2.0 Sufficient Sufficient -
Source: Fitch, issuers annual reports
-
Corporates
Investment-Grade Corporates
July 2012 17
Cement
The rupee depreciation will hit cement companies because they
depend on imported coal for
production. Coal comprises around 15%-20% of total production
costs. Big cement companies
with a pan-India presence like ACC Ltd (Fitch
AAA(ind)/Stable/Fitch A1+(ind)) imports around
20% of its coal while Ambuja Cements Limited (Fitch
AAA(ind)/Stable/Fitch A1+(ind)) imports
around 35%. The level rises to 45% for Ultratech Cement Limited.
Most cement companies
based in southern India largely depend on imports for their coal
requirements. Fitch notes that
given the overcapacity in the industry the cement companies will
have limited ability to pass on
increase in cost to their final customers.
Capex will rise for companies importing equipment and machinery.
However, many cement
plants have deferred or stalled expansion projects due to the
prevailing economic environment.
Business-Model Driven Exposure
Diversified Manufacturing
The impact of forex depreciation will be nominal for four of the
22 Fitch-rated investment-grade
diversified manufacturing companies. The details of the
remaining are provided below:
This group consists of specialised manufacturers across
different industries. The 13 issuers
that are expected to positively benefit from sustained rupee
depreciation have significantly
higher exports than imports. Exports relate to industrials
(Axiom Cordage, Responsive
Industries Limited,), capital goods (Fouress Engineering,
Caterpillar India) and consumer
discretionary (Mainetti India, Primacy Industries). However, the
positive benefit due to rupee
depreciation may be limited because of a slowdown in key export
markets.
Figure 27 Diversified Manufacturing
Company Rating Outlook Margin impact at
INR55/USD (%) Rating headroom (at INR55/USD)
Rating headroom (at INR60/USD)
Forex debt as proportion of total
debt (%)
Caterpillar India Private Limited Fitch AAA(ind) Stable 4.0 to
6.0 Comfortable, linked to parent
Comfortable, linked to parent
0
Greaves Cotton Ltd Fitch AA(ind) Stable -2.0 to 0.0 Sufficient
Sufficient 0 Owens-Corning (India) Private Limited Fitch AA(ind)
Stable 2.0 to 0.0 Comfortable Comfortable 100 SRF Limited Fitch
AA(ind) Stable 0.0 to 1.0 Comfortable Comfortable 68 HEG Limited
Fitch AA(ind) Negative 3.0 to 1.0 Low Low 0 English Indian Clays
Limited Fitch A(ind) Stable 0.0 to 1.0 Sufficient Sufficient 32
Videocon Industries Limited Fitch A(ind) Stable -2.0 to 0.0 Under
review Under review 16 Rain Commodities Ltd Fitch A(ind) Stable 0.0
0 Axiom Cordages Limited Fitch A(ind) Stable 2.1 to 4.0 Comfortable
Comfortable 82 Responsive Industries Limited Fitch A(ind) Stable
0.0 to 2.0 Comfortable Comfortable 0 Fouress Engineering India
Limited Fitch BBB+(ind) Negative 2.0 to 0.0 Low Low 0 Jain
Irrigation Systems Ltd Fitch BBB(ind) Negative 3.0 to 1.0 Low Low 0
Primacy Industries Limited Fitch BBB(ind) Stable 4.0 to 6.0
Comfortable Comfortable 23 Mainetti (India) Pvt Ltd Fitch BBB(ind)
Stable 3.1 to 5.0 Comfortable Comfortable 20 Bhansali Engineering
Polymers Limited Fitch BBB(ind) Stable -3.0 to -1.0 Sufficient
Sufficient 0 Rangsons Electronics Pvt Ltd Fitch BBB(ind) Stable 0.0
Sufficient Sufficient 0 ZF Electronics TVS (India) Pvt Ltd Fitch
BBB(ind) Stable 1.0 to 3.0 Comfortable Comfortable 0
Source: Fitch, issuers annual reports
-
Corporates
Investment-Grade Corporates
July 2012 18
Indirect Impact of Rupee Depreciation
These are companies that would essentially be purchasers of
commodities linked to IPP. Their
business models are comparable to net importers to the extent
that the inflated cost (due to
rupee depreciation) of their raw materials would not be easily
passed onto the customer.
These are sectors such as real estate (steel and cement comprise
close to half of construction
cost), print media (newsprint and Pulp), and metal (both ferrous
and non-ferrous) processors.
While the global reduction in commodity prices would have
actually benefitted their cost
structure and may have boosted demand, the more than
commensurate rupee depreciation
has snatched away the advantage.
Impact on Sub-Investment Grade Issuers
Sub-investment grade companies are always more vulnerable to
business cycles. The
directional impact on operating margins may be comparable to the
sectors in which they belong.
Thus textile, pharmaceutical and technology companies are likely
to make an opportunistic gain
due to their unhedged position. However they are more likely to
face drastic price
renegotiations from their customers.
Companies in sectors such as chemical and metal processing are
more likely to absorb
significant price rises (due to depreciation, which would affect
their margins and significantly
stress their credit profile). The impact on traders of processed
and unprocessed commodities
(metals, chemicals, papers, rubbers) is expected to be similarly
stressed. In each of these
cases, the higher cost of inventory, along with a possible
increase in the working capital cycle,
could stress their liquidity positions in the absence of
suitable funding options.
What May Change the Projected Outcome
Most of the triggers -- both positive and negative -- in the
short term (defined as the next 12
months) are factors external to India. Maintenance of the rupee
at around INR55/USD1 to
IBR57/USD may depend on a relatively orderly resolution of the
euro crisis ( to moderate flight
to dollar-asset), a smooth rebalancing of Chinas growth (to
prevent further deterioration of
sentiment towards emerging markets) and avoiding geopolitical
flare-ups (to prevent a spike in
oil prices). An adverse change in any of these factors may
further depreciate the rupee. This,
would, however, feed into the deteriorating domestic balance of
payments situation and
aggravate it further.
Given negative real interest rates and the pressure on the
exchange range, extremely limited
scope remains for monetary policy to correct the situation.
Similarly, fiscal tools have limited
scope without further affecting the sovereign credit profile,
given the high domestic fiscal deficit.
Furthermore, should inadequate rainfall affect agricultural
output, the government may be
expected to provide a stimulus to the sector as has been
observed historically. This may
aggravate the fiscal deterioration.
Domestic policy-driven solutions to address structural issues
(such as deregulation of various
subsidies) may improve investor sentiment. But these benefits
take time and the immediate
impact is likely to be a higher inflation or further demand
destruction.
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Investment-Grade Corporates
July 2012 19
Appendix 1: Relative Depreciation of the Rupee
Analysis of select parameters
Figure 28 Emerging Market Economies
Brazil
South Africa India Turkey
Sri Lanka Mexico Bangladesh Argentina Mongolia Russia
Indonesia
South Korea Chile Thailand Malaysia Taiwan Vietnam Philippines
China
Annual change in local currency rate against USD
-20% -17% -17% -15% -14% -14% -11% -9% -8% -7% -6% -6% -4% -3%
-2% -1% 0% 2% 3%
9-month change in local currency rate against USD
-19% -12% -16% -1% -15% -10% -9% -6% -6% -5% -8% -6% -5% -4% -3%
-2% -1% 0% 1%
6-month change in local currency rate against USD
-10% -1% -6% 0% -15% 0% -7% -4% -2% 1% -3% -2% 2% -1% 2% 2% 0%
2% 1%
3-month change in Local Currency rate against USD
-13% -5% -8% -2% -8% -6% 2% -2% 1% -1% -3% -2% -2% -1% -2% 1% 0%
0% 0%
Ranked as current account balance (CAB) % GDP 2012
a
13 15 14 17 16 10 7 18 3 8 6 12 9 1 2 11 4 5
2011 13 14 15 17 16 11 10 18 3 8 7 12 4 1 2 9 5 6 2010 13 15 14
17 12 11 9 18 4 10 7 8 6 1 2 16 5 3 Ranked change in CAB % GDP
2012-2011
b
10 14 5 1 2 7 8 3 17 12 11 15 18 4 13 16 6 9
2011-2010 4 11 12 16 17 8 10 18 2 6 5 15 9 3 7 1 13 14 Ranked as
trade openness % GDP
c
18 12 13 15 9 10 17 4 11 16 6 7 3 2 5 1 8 14
Ranked as general government balance % GDP
d
12 16 18 5 17 10 9 14 1 4 3 2 7 13 11 15 8 6
a Ranked 1 for the country with highest CAB % of GDP and 18 for
the country with lowest CAB % of GDP among the group of 18
countries.
b Ranked 1 for the country with highest improvement in CAB over
2011 with 18 for the worst/lowest improvement in CAB as a % of
GDP.
c Ranked 1 for the country with highest trade openness % of GDP
and 18 for the country with lowest trade openness % of GDP among
the group of 18 countries.
d Ranked 1 for the country with highest general government
balance % of GDP and 18 for the country with lowest among the group
of 18 countries.
Source: Fitch
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Corporates
Investment-Grade Corporates
July 2012 20
An analysis was performed on a group of 18 countries
representing prominent emerging
nations or countries that compete with India on a specific
export-oriented sector (such as
textiles from Bangladesh). The countries whose local currencies
depreciated the most against
dollar as a group have the highest current account balance as a
proportion of respective GDP.
However, there are exceptions. Examples include Mongolia (ranked
18th, worst CAB/GDP) and
Chile (ranked 12th), whose currencies have depreciated less than
10% against USD.
If the countries are ranked in terms of deterioration in CAB/GDP
ratio from 2011 to 2012, then
the ranking suggests that some of the countries that have shown
the worst deterioration are
also countries (Mongolia, Chile) that have depreciated the least
against dollar. (In fact some
have appreciated, such as the Philippines and China.)
Among these parameters (particularly CAB and government fiscal
deficit related), on an
aggregated basis, India along with Sri Lanka, Mongolia, South
Africa and Turkey have the
worst deterioration. The direction of the movement of local
currencies against the US dollar
may be driven by the fundamentals. However, this fully does not
explain the huge depreciation
on the domestic currency value against the dollar.
For instance, Brazil (whose currency depreciated the most
against the dollar), may be
comparable with Mexico, Mongolia, Vietnam Argentina and Chile on
the basis of relative
deterioration of these select macroeconomic parameters. However,
each of these five countries
has local currencies that have shown relatively much lower
depreciation.
Impact of Global Risk Aversion
Some of the countries (Brazil, India, South Africa) whose
currency have depreciated the most
in the last 12 months are tracked in Figure 29. These countries,
along with China and Russia,
have been among the highest beneficiaries of capital inflows in
emerging nations during the
period of 2004 to 2008. Risk aversion may have reversed a
significant portion of such capital
flows. As a measure of rise aversion of financial markets, the
respective sovereign credit
default swap (CDS) spreads are tracked in Figures 30-31.
Figure 29
0.80
0.85
0.90
0.95
1.00
1.05
1.10
Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11
Jan 12 Feb 12 Mar 12 Apr 12 May 12
Brazil Russia India China South Africa(Depreciation)
Yearly Fluctuation
Source: Fitch
(Months)
Figure 30
0.50
1.00
1.50
2.00
2.50
Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11
Jan 12 Feb 12 Mar 12 Apr 12 May 12
Brazil Russia India China SA(April 2011 = 1)
CDS Spreads - Indexed
Representative CDS of issuers linked to Soveriegn of
IndiaSource: Fitch, Bloomberg
(Months)
a
a
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Investment-Grade Corporates
July 2012 21
Figure 31
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11
Jan 12 Feb 12 Mar 12 Apr 12
USA Italy Spain Portugal(April 2011 = 1)
CDS Spreads - Indexed
Source: Fitch, Bloomberg
(Months)
The timing of depreciation of most of the countries (India,
Brazil, Russia, South Africa) more-or-
less coincided with the increase in CDS spreads of these
countries
A sharp deterioration was observed from July 2011 to October
2011. It was followed by a
period of stabilisation. The almost synchronised pattern of
depreciation in these currencies
again started from February 2012. A comparable pattern was also
observed in the CDS
spreads of these nations (particularly India, South Africa and
Brazil).
The risk aversion in financial markets is also reflected by
widening of spreads of CDS of a
sample of stressed European nations. Over the same periods the
reduction in spread of US
CDS has reduced, reflecting the perceived flight to safety of
global financial markets to US
assets.
Until risk aversion subsides, the rupee is unlikely to
appreciate. On the contrary, the currency
may depreciate further if global risk aversion worsens. Any
policy action that may be adopted
by the government and banking regulator is unlikely to improve
the fundaments over the short
term. At best they may have a positive impact on sentiment of
financial markets.
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Corporates
Investment-Grade Corporates
July 2012 22
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