A DECLINING RUPEE HURTS SOME INDIAN COMPANIES MORE THAN OTHERS (MOODY'S)

State-Run Indian Oil Corporation (IOC) at Most Risk If Gov’t Subsidies Fall Short

Adverse impact of weaker currency varies for issuers. The severity of the weakening Indian rupee (INR) on Indian corporate issuers ranges from high but potentially recoverable for Indian Oil Corporation (IOC, Baa3 stable) to low for regulated utilities and export-oriented companies, which benefit, respectively, from an automatic pass-through of higher costs and from exports that have now become more competitively priced. For others, such as the Tata Group companies, offshore operations may accentuate or mitigate the impact of a depreciated local currency.

India’s dependence on energy imports raises credit risk for oil marketers. Depreciating local currencies can help export-oriented emerging markets. However, India’s persistently high inflation and dependence on energy imports of oil, gas, and increasingly coal, provide limited leeway for its regulated, import-dependent sectors to cope with higher import bills caused by a weakened currency. A failure by the Indian government to fully compensate such rising costs at state-owned IOC would put the oil-marketing company’s finances at risk.

Ratio of net imports/EBITDA is more damaging than share of forex debt to total. At 8x, IOC stands out as having by far the highest ratio of net imports to EBITDA of all rated issuers, which makes the company vulnerable to a declining local currency by magnifying its impact on profitability. Exposure to debt denominated in foreign exchange (forex) does not have a similar, magnifying effect on debt or interest costs.

Most forex bond debt for Indian corporate issuers does not come due until 2014 or later. Eleven major issuers have little near-term exposure to maturing forex bonds. However, some issuers, including IOC, will need to refinance their short term foreign currency bank debt in the next 12 months, which may get challenging if Europe’s credit crunch reaches Asia and causes spreads to widen or curtails lending.

To read full report: DECLINING RUPEE

RISH TRADER