Credit quality of India firms at risk: Moody's

Global agency Moody's has said a weak rupee and higher borrowing costs will impact credit quality of several Indian companies especially, Indian Oil Corporation (IOC), Tata Steel and Tata Power.

Furthermore, it said, depreciation of the Indian currency will lead to revaluation of debt issued in US dollars, which in turn could put pressure on some covenants.

"Increased borrowing costs and the weak rupee will pressure the credit quality of rated Indian non-financial companies," Moody's said in a report titled 'Higher borrowing costs, weak rupee will pressure Indian corporate credit metrics'.

It said interest rates in India will likely rise further amid measures by the Reserve Bank of India (RBI) to tighten liquidity and bolster the rupee, which has fallen near historic lows against the dollar.

"Interest rates for foreign currency borrowings will also increase in light of the US Federal Reserve's decision to taper its bond-buying programme," the report said.

The agency highlighted that the 14 non-financial companies that it rates in India have combined debt of Rs 2.2 lakh crore ($32 billion) which is maturing in the fiscal year ending March 2014. Out of this, over 50 per cent is denominated in foreign currency.

Referring to IOC, Tata Steel and Tata Power, Moody's said these companies are highly leveraged over the next 12 months and face a steeper increase in interest costs.

"We believe they will be able to refinance their maturing debt, but possibly at higher credit spreads than on existing debt," it said.

On Oil and Natural Gas Corporation (ONGC), Reliance Industries (RIL), Tata Consultancy Services (TCS) and GAIL, Moody's said they operate with large cash balances, which provide a buffer to fund any shortfall in working capital requirements and support near-term refinancing needs, if required.

The report also said that rated companies with debt denominated in foreign currencies will report an increase in total debt value as a result of the historically low rupee exchange rate.

The current exchange rate (value) for rupee against the US dollar is about 15 per cent below where it was on March 31, Moody's said.

"If the companies' total reported debt increases owing to foreign exchange moves, their financial covenant cushion will likely decline, particularly with respect to interest coverage and debt service coverage ratios, as we expect their interest costs to increase as well," it said.

The rated companies, however, have some degree of natural hedge to mitigate against the impact of the depreciating rupee, Moody's added.