IOC, BPCL, HPCL face biggest challenge with falling rupee: Moody's
New Delhi   14-Dec-2011

Moody's investor service on Wednesday said in a report that a sharp decline in rupee exerts pressure on oil marketing companies such as IndianOil, HPCL and BPCL and companies with foreign currency debt faces direct impact of the weaker currency.

"Energy constitutes the largest portion of India's import bill, and IOC, together with the other unrated Indian refining and marketing companies BPCL and HPCL, which import oil to supplement their small amounts of domestic production, have the most direct exposure to a weaker local currency," says Alan Greene, Vice President and Senior Credit Officer at Moody's, in a report.

The rupee which has depreciated 15-20% so far in 2011 touched a new low of Rs 53.69 on Wednesday versus dollar, weighed down by slowdown in India economy and European debt crisis.

According to a Reuters Poll, the rupee has probably touched its bottom and will rise modestly by the end of next year.

"There is a growing expectation that Asian central banks -- including the Reserve Bank of India -- will ease policy in the first half of 2012, stimulating growth in the second half and drawing nervous investors back. The rupee is expected to trade above 51 in three months, strengthening to 49 around this time next year," said the report.

Indian companies which have a lot of foreign currency debt on their balance sheets will get impacted more by the weaker rupee as the fall in currency will increase the debt-servicing costs of these companies.

The risks for those holding large amounts of USD-denominated debt are also manageable in the near term, given that debt maturities are limited for this time frame, Moody's says in a new report.

To a moderate degree, the rupee depreciation may also affect the Tata Group's manufacturing companies with large foreign operations, although Tata Steel is the most vulnerable among these.

"For auto exports from Tata Motors, the firm's domestic base operations will benefit little because its underlying, USD-linked raw materials of steel now cost more," said the report.

The report also highlighted that the companies, which are in the business of exports, may benefit from the weakness in the currency. Sectors such as information technology will gain from the depreciating rupee, but only for short term. However, over time, domestic wage inflation offsets the advantages.

Analyst Call: Vijay Bhambwani, Author, CEO, BSPLindia.com

Let's take the pure oil marketing company plays first, HP, BPCL and IOC. Of these, BPCL and HPCL might fall as compared to IOC. Although it appears weak on the charts and is resisting a precipitous decline in the absolute near term but is definitely a short sell.

As far as Reliance is concerned, Reliance is also facing tremendous amount of pressure. Levels of Rs 720-725 band is what I would watch out for. If that is breached, Reliance is into a very bad time then. The stock may even go all the way to Rs 660 or Rs 680.