Now that the interest rates in the U.S. are rising and the Federal Reserves (Fed) is in the midst of reducing its balance sheet, the dynamics of dollar-denominated credit markets have changed significantly. At Ventura Securities, we analyse such factors minutely to understand their effects on the Indian economy, corporates and investors.
The world has to wait until the high tide recedes, to know how well clad you are while swimming in the sea. Low tides often embarrass swimmers.
In the times of easy liquidity, many Indian companies borrowed from overseas sources to benefit from the near zero-interest rates thinking that they will continue to grow at astronomical rates permanently.
Now that the tide is turning, they will have to bear the brunt. To make things worse, Indian Rupee depreciated 10% against USD in 2018. The worst affected ones are those who have a pile of un-hedged foreign currency loans.
According to RBI data, at USD 189.7 billion, the share of corporates in India’s overall foreign currency debt is 36%. Since country’s Foreign Exchange Reserves to Total External Debt Ratio is a little over 80%, there’s no systemic risk as yet.
We analysed all companies that have accessed External Commercial Borrowings (ECBs) route and left out those with lower than Rs 1,000 crore of foreign currency debt on their books. Among the remaining ones, we excluded companies deriving substantial revenues from overseas operations.
Finally, we applied two parameters—debt to equity ratio and return on capital employed to gauge how judicious the companies were with their overseas borrowing programmes.
Just having high ECB exposure doesn’t make any company a bad investment if the consolidated debt to equity ratio is less than 1 and return on capital employed is high.
Investors of below-listed companies have to be careful. Most of them have witnessed massive erosions in their market caps already; but few names have popped-up surprisingly.
Heydays might be over for highly indebted corporates laden with ECBs. To service their debt, these companies will have to dig deeper into their pockets which will eventually affect their profitability.
Lesson to learn: You have to be wary of companies that go overzealous on debt-backed growth during the phases of easy liquidity and economic upswings. If they are piling up overseas loans despite having predominantly domestic operations, you have to be all the more careful.
As they say, there is no such thing as a free lunch.
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