Mukesh Ambani, you should have hedged your bets. According to reports, India’s richest man and the chairman of Reliance Industries Ltd., operator of the world’s biggest oil refinery complex, lost about $5.6bn, or 24 percent of his wealth, after the rupee’s plunge got worse.
But Indian corporates have fared much better. That’s because they hedged their bets in the currency markets, according to a report from Fitch Ratings Service. According to its report, Fitch said “the majority of its portfolio of internationally rated industrial corporates in India has adequate hedging arrangements in place to minimize any potential reductions in operating cash flows arising from the rupee rout.” In addition, Fitch said, most of these companies have the wherewithal to absorb “an elevation in reported debt levels post FX translation adjustments.”
This is a good reminder that hedge programs should revisited often to make sure they are doing what they are supposed to be doing. Despite recent news that OTC derivative users will not need to post margin, it’s still a good idea make sure these programs are helping the company in its planning and forecasting – and protecting the company’s cash, too.
As an example of how Indian companies have prepared, Fitch cited the case of the country’s industrials, which in most cases are either naturally hedged “via import parity-linked selling prices,” or have hedges in place for more than 50 percent of their FX exposure. For instance, metal company Tata Steel will benefit at the operating level as most of its selling prices are in US dollars while its costs are in INR.
Despite some of the upside for Indian MNCs, there are concerns and looming risks. One, Fitch said, are “higher reported debt levels stemming from FX translation adjustments, particularly for those companies with substantial foreign currency-denominated debt, which is typically held at offshore subsidiaries.” This will have a negative impact credit metrics like financial leverage. Also weakness in the domestic economy could negate some of the import parity and/or hedging benefits. Finally, the credit outlook isn’t so hot, with credit profiles expected to weaken over the next 12 months.
In the meantime, India’s new central bank governor, Raghuram Rajan, has much work to do. The rupee has staged a slight comeback, although it is surmised that there has been heavy intervention on the part of the Reserve Bank of India. This is not usually seen as a sustainable strategy.