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Rupee Fall Drives Up Offshore Debt Costs For India Inc

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The rupee's slide to record lows is squeezing mid-sized companies that borrowed offshore when times were good, with a slowing economy now making it even harder for them to generate the extra funds needed to cover dollar payments.

Many firms in capital-intensive industries such as infrastructure, manufacturing and metals that borrowed in offshore markets lack an overseas income stream to buffer their currency exposure, and the impact is expected to become clear in the current reporting season.

The rupee is down nearly 10 per cent against the dollar since the start of May, hitting a record low of 61.21 per dollar on 8 July. It has lost more than half its value since early 2008, when it had strengthened past 40 per dollar to decade highs.

That has substantially increased not only the rupee value of outstanding dollar debt, but also the amount of rupees companies need to generate to meet regular interest payments.

"This is not a fall which any company or any country can expect in a short span of time," said Seshagiri Rao, joint managing director of JSW Steel, which has consolidated debt of $4.9 billion. Of that, about $2 billion is in foreign currency, and none of it hedged. "Volatility, that is the major concern."

JSW Steel, 15 per cent-owned by Japan's JFE Holdings Inc, makes about 75 per cent of its sales in India.

The average market estimate of JSW's earnings have been cut by 15 per cent since April, and it is expected to post a net loss of about 4 billion rupees in the June quarter, Thomson Reuters data shows.

Brokerage Anand Rathi says a contributing factor would be an expected 60 per cent jump in debt servicing costs. Rao declined to comment on that forecast ahead of quarterly earnings set for 31 July.

"Clearly, the economic sluggishness will impact the earnings outlook, and on top of that you will see in various companies the additional impact of the weaker rupee," said Michiel van Voorst, senior portfolio manager for Asia Pacific Equities at Robeco in Hong Kong.

India's economy is expanding at its slowest pace in a decade, and Bank of America-Merrill Lynch on Tuesday cut its GDP forecast for Asia's third-largest economy to 5.5 per cent from 5.8 per cent for the fiscal year ending March 2014.

Indian companies had foreign currency debt of more than $200 billion as of March, Crisil Research said, of which only half is hedged, or protected against losses caused by currency moves.

"When the money was available cheap in the offshore markets, all sorts of companies rushed to tap it and only a few thought about a hedging strategy because that also involves cost," said a loan banker with a large European bank in Mumbai.

Jaiprakash Associates, which with its subsidiaries has debt of $7.5 billion, has hedged its foreign currency loans but still expects some, though not significant, impact from the weaker rupee, Executive Chairman Manoj Gaur told Reuters.

The infrastructure firm's debt includes a $247 million loan raised in three tranches in 2007, according to Thomson Reuters LPC data, with roughly $50 million maturing in March next year.

In rupee terms, the interest bill on a $247 million loan with a coupon rate of about 220 basis points over Libor would be 1 billion rupees, a jump of more than one-third over the local currency needed to meet the same interest payments in 2007.

Other mid-sized companies with overseas debt include Adani Enterprises, which has about $3 billion of dollar debt among its total debt of $11.5 billion, and GMR Infrastructure, which has debt of $5.6 billion but does not provide a breakdown of how much is in foreign currencies.

Like Jaiprakash, they build and run infrastructure projects, which have a long lead time before producing revenue. The credit profile of many infrastructure builders has deteriorated in recent years amid delays in projects.

Since April, analysts have cut their earnings estimates for the current fiscal year for many companies carrying debt. The average estimate for Jaiprakash has been slashed by a quarter and the forecast for Adani has been lowered by 13 per cent.

The estimated loss for GMR has widened to 0.68 rupees per share from 0.30 at the beginning of the fiscal year. But not everyone will feel the pain of a weaker rupee.

Some of the biggest overseas borrowers, top-tier firms such as Bharti Airtel, Tata Steel, Tata Motors and Reliance Industries, also have significant offshore revenue streams.

And big exporters, including IT services firms such as Infosys and generic drug makers such as Cipla and Sun Pharmaceutical, reap the benefits of a weaker rupee because most of their sales are made abroad.

For most others, the next 18 months could be the most challenging business environment since 2000, India Ratings & Research, Fitch's local unit, said in a report on Wednesday.

The cash generation and debt-servicing ability of the 500 companies that make up a Bombay Stock Exchange index, which covers nearly 93 per cent of the market's total value, is at its weakest since 2008, the report said.

"The worst affected would be net importers, with high forex loans," said Deep Mukherjee, director of corporate ratings at India Ratings. "If they are already having revenue and margin pressure, the rupee depreciation is expected to adversely affect their profile."


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