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Informist, Tuesday, Apr. 8, 2025

 

KOLKATA – The current volatility of the rupee against the dollar could dent earnings of companies in sectors such as complex fertilisers, airlines, oil and gas refining and marketing, polyvinyl chloride pipes and fittings, capital goods, and renewable power in the current financial year, Crisil Ratings Ltd. said Tuesday. However, the overall impact on the credit profiles of companies is seen neutral, the rating agency said.

 

The operating profitability of some segments of complex fertiliser manufacturers, such as di-ammonium phosphate, is expected to be adversely impacted by up to 200-250 basis points given their sizeable proportion of raw material imports, Crisil Ratings said in a report. The fertiliser manufacturing sector gets compensation in the form of subsidies, the rates for which are announced twice a year, mitigating some impact of rupee depreciation during the year, it said.

 

In the airlines segment, while the impact of higher fuel cost for international refuelling will be offset largely by revenue from foreign currency ticketing sales, the net profits could be hit by 75-125 basis points given sizeable dollar-denominated lease liability obligations, Crisil Ratings said. However, the impact could be mitigated by currency hedging, as over 50% of lease liability obligations in this sector are hedged. Additionally, lower fuel prices in US dollar terms may offer some respite for airlines operators. 

 

For oil and gas companies in the refining and marketing segment, as the prices of key end-products such as diesel and petrol are regulated and fixed, the increase in crude oil cost due to rupee depreciation could impact operating profitability by up to 125 basis points. However, on account of the current favourable crude oil prices, which are at an average price of $75 per barrel over the past six months in India, the profitability is trending above the historical average and there is some cushion against the adverse foreign exchange movement, the report said. 

 

Companies in the polyvinyl chloride pipes and fittings sector import about 50% of their raw material that exposes them to volatility in currency fluctuations. While there is some ability to pass on the increase in prices to customers, this depends on demand strength and could come with a lag which could lead to 50-100 basis points impact on the operating profitability, Crisil Ratings said, adding that volatility in raw material prices may result in inventory losses, as was seen in the past. 

 

In the capital goods sector, companies which rely on imports could see their profitability take a hit, while those that export finished products will be better placed. At the same time, pharmaceuticals and renewable power sector may see marginal pressure on profitability and project returns respectively as majority of the raw materials that are intermediates and modules are imported. 

 

The extent of the impact will depend on the exposure to foreign trade, ability to pass on the cost increase and individual hedging practices by the companies, Crisil Ratings said. There might also be player-specific impact across sectors based on the extent of unhedged foreign currency debt exposure. 

 

According to the rating agency, the rupee moved from INR 83.81 per dollar on Oct. 1 to INR 87.40 on Feb. 28, before appreciating to INR 85.65 on Apr. 3. Crisil Intelligence expects the rupee to continue to depreciate against the dollar and settle at INR 88 by end of the ongoing financial year. 

 

Companies in sectors like information technology, home textiles and marine foods, which are net exporters, stand to gain from a depreciating rupee. 

 

At the same time, the impact may not be material for other sectors with sizeable overseas trade exposure such as pharmaceuticals, chemicals, primary steel producers, gems & jewellery, ceramics, city gas distribution and edible oil due to the presence of a natural hedge or high propensity to pass on the incremental cost to customers, the rating agency noted. Depending on whether the benefit of depreciating rupee is retained or passed on to customers, profitability could improve by up to 100 basis points in the near term. 

 

While the near-term impact on earnings of companies remains monitorable, the overall credit impact is likely to be neutral as it will get neutralised over the medium term once businesses adapt to the new currency levels. The company-specific impact will also depend on the proportion of outstanding debt exposure in dollar and hedging practices adopted as rupee's depreciation would inflate liabilities and lead to higher debt obligations. 

 

Crisil Ratings said it will continue to monitor the developments, engage with companies, and assess the impact on their credit profiles on a case-by-case basis as appropriate.  End
 

Reported by Avishek Rakshit

Edited by Vandana Hingorani

 

 

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