How India's energy & utilities firms will suffer from rupee depreciation

Will they be badly beaten?

In a report, Fitch Ratings has said that the depreciation of the Indian rupee has varying levels of implications for rated energy & utilities companies in India, but their ratings are not immediately affected. 

The risks to standalone financial profiles are highest for state-controlled petroleum marketing companies among the Indian energy sector issuers currently rated by Fitch.

The Indian rupee has depreciated by over 25% versus the USD since 1 April 2013. Fitch expects limited negative credit implications for most of the rated issuers due to natural or financial hedges or, in the case of utilities, tariff mechanisms that allow for exchange rate fluctuations.

The rated oil & gas companies have a significant proportion of foreign currency (FC)-denominated debt; however, they benefit from varying degrees of natural hedges present in their operations.

Utility companies have a much lower proportion of FC debt, and at the same time have the ability to pass on foreign exchange fluctuations as part of their tariff-setting mechanisms, which provides them with greater protection against the depreciation of the rupee.

The majority-state owned oil refining and marketing companies - Indian Oil Corporation Ltd (IOC, BBB-/Stable) and Bharat Petroleum Corporation Ltd (BPCL, BBB-/Stable) - had over 50% of their total debt in foreign currencies at FYE13. However, the computation of the subsidy amount from the state to cover under-recoveries arising from selling certain fuels below market prices is based on USD terms.

Because their refining margins are also linked to regional refining margins denominated in USD, the profitability of the refining operations will benefit from the rupee rout.

Regular increases in the price of diesel have reduced the under-recoveries, and hence the subsidy requirement; however, the rupee depreciation will reverse this trend.

While further price increases for diesel are being considered to reduce the subsidy requirement, the quantum of such price increases remains challenged by pressures on consumer inflation and political dynamics in India.