Higher Funding Costs for Rated Indian Corporates Will Put Pressure on Margins, Says Moody's

Moody's Investors Service says that higher funding costs for rated Indian corporates will put pressure on margins, particularly for companies already challenged by slower growth prospects. Furthermore, depreciation of the Indian Rupee will lead to revaluation of debt issued in US dollars, which in turn could put pressure on some covenants.


Moody's also highlights that the 14 non-financial companies that it rates in India have combined debt of INR2.2 trillion ($32 billion) maturing in the fiscal year ending March 2014 (FY 13), out of which over 50% is denominated in foreign currency. However, Moody's believes that these companies will be able to refinance maturing debt from the domestic banking system, as well as the international capital markets.


"We expect domestic banks to continue rolling over the companies' credit facilities and these companies will continue to have access to funding from international banks and capital markets, given that these firms are among the largest in their respective industries, with strong brand names and long histories," says Alan Greene, a Moody's Vice President and Senior Credit Officer.


"These companies also maintain good relationships with domestic banks and have solid track records of accessing international funding," adds Greene.


Greene is a co-author of a just-released Moody's report titled: "Indian Corporates: Higher Borrowing Costs, Weak Rupee Will Pressure Indian Corporate Credit Metrics."


Moody's report says interest rates - both on rupee and foreign currency borrowings - are likely to increase.


Interest rates in India are on the rise given the measures by the Reserve Bank of India to tighten liquidity in order to bolster the rupee, which has fallen to historic lows against the US dollar.


The borrowing cost for the foreign currency debt is also on the rise in light of the US Federal Reserve's decision to taper its bond-buying programme.


Nonetheless, Moody's report says that the firms can manage their increasing financing costs, because cash flows should be sufficient to service the higher interest costs.


However, their credit metrics -- particularly interest coverage and debt service coverage -- will deteriorate, as interest costs rise, which will reduce headroom under the financial covenants of some companies.


The report also says that while companies with debt denominated in foreign currencies will report an increase in total leverage as a result of the depreciating rupee, these firms have mitigated some of their foreign exchange exposures.


Some companies, for instance, use their debt denominated in foreign currencies to invest in overseas operations, which in turn are a natural hedge because the foreign currency debt is serviced by the profits of the foreign operations.


The rated companies with little or no foreign operations are primarily engaged in basic commodities and generate revenues in US dollars or in currencies linked to US dollars.


However, Moody's report points out that state-owned downstream oil marketing companies are most affected by the depreciating rupee, because while their revenues are linked to the US dollar, their EBITDA margins are thin, at between 3% and 5%. They are also highly leveraged.


"Rupee depreciation will increase the state-owned downstream oil marketing firms' borrowings, as they revalue their existing foreign currency borrowings upward and require more working capital to fund increased commodity costs and under-recoveries," says Vikas Halan, a Moody's Vice President -- Senior Analyst.


For business process outsourcing companies, the report says their large cash balances help fund any shortfall in working capital requirements and support near- term refinancing needs. These firms' low near-term maturities also help insulate them from any tightening in liquidity levels.


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