Rupee fall will reduce pain from economic slowdown for Indian companies: S&P
15 Dec 2011
The recent fall in the value of the Indian rupee is likely to support the profits of about 70 per cent of indian companies rated by ratings agency S&P.
In a report, Rupee Depreciation: Good For Company Profits, Not So For Leverage, S&P Ratings Service, however, qualifies that leverage will not improve for most companies.
"Revenue for companies that export and operate overseas will rise because they will get more rupees for goods and services they sell," said Standard & Poor's credit analyst Mehul Sukkawala. "Companies that link their selling price to global prices can also now command a higher price in the domestic market."
Such gains will soothe the pain that weak demand--both in India and globally--has been inflicting on Indian companies.
But this benefit comes with a cost: Debt-servicing requirements will increase, particularly for companies with a high share of foreign currency borrowings. The debt servicing and financial leverage of only 30 per cent of the companies we rate in India are likely to improve due to the depreciating rupee.
"We believe the risk is particularly high for companies that have high debt servicing requirements due to significant foreign currency borrowings coming up for repayment in the near term," said Sukkawala.
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