Rupee depreciation to hurt India Inc: CRISIL Research

CRISIL Research's report on rupee depreciation

CRISIL Research, India's largest independent and integrated research house, expects India Inc to be severely impacted by the rupee's depreciation against the dollar given the large foreign currency debt on the books and only partial hedging. Moreover, the rupee's depreciation will lift input costs across many sectors amidst weak demand environment as reflected in low double digit topline growth expected in 2013-14. Even exporters are unlikely to benefit significantly as clients may seek to renegotiate contracts. We expect the rupee to strengthen from its current levels, but the 2013-14 average will still be 5-8 per cent weaker than the 2012-13 average.

Surge in interest servicing costs for companies with forex debt
Indian companies with foreign debt on their books and without any natural hedge in the form of forex earnings will be badly hurt by the depreciation of the rupee. This is because the outgo towards interest on this debt, marked-to-market losses, and rollover of hedged positions will increase. Indian companies have increasingly been resorting to borrowing abroad in order to take advantage of the lower interest rates on offer. For companies in the CNX Nifty (excluding banking and financial services), around 40 per cent of debt is denominated in foreign currency. In total, corporate India had forex debt outstanding of over USD 200 billion as of March 2013, of which close to 45 per cent is short-term debt. Moreover, only half their forex exposure is hedged. Persistent weakness in the rupee and heightened volatility has reduced the benefits of borrowing overseas.

Increasing input costs to hurt several sectors
From the growth and profitability perspective, sectors that will be negatively impacted by the rupee's depreciation include automobiles, auto components, airlines, consumer durables, oil marketing companies, and fertilisers. The increase in fuel costs will hurt the demand for automobiles, especially small cars, as fuel alone accounts for close to 25-30 per cent of the ownership cost of a small car in the year of purchase. Airlines with a high proportion of revenues accruing from domestic operations will also be hurt as 70 per cent of their operating costs are incurred in dollars, and their ability to pass on any cost increase is limited, given the sobering impact of price increases on demand. We do not expect diesel prices to increase by more than Rs 1.50 per litre from the current level; therefore, a weak rupee would increase under-recoveries of oil marketing companies. We foresee under-recoveries touching Rs 1,050 billion in 2013-14, around 10 per cent higher than our previous estimate.

Positive for crude oil producers and refineries; neutral for steel
Crude oil producers and pure-play oil refiners also stand to gain, as their product prices and profitability, denominated in dollars, are determined by global demand-supply dynamics. Therefore, a weaker rupee will boost their earnings in rupee terms. The landed cost of steel will also increase, but manufacturers won't be able to increase domestic prices commensurately due to the subdued demand environment. Moreover, coking coal costs would increase, which would keep margins of players under pressure.

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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