Dollar Debt Lures Tata, JSW as Rupee Stabilizes: Corporate India

Tata Steel Ltd. (TATA), Essar Oil Ltd. (ESOIL) and JSW Steel Ltd. are among Indian companies racing to cut debt costs as the lowest rupee volatility in three years makes it cheaper to refinance local loans overseas.

Tata Steel, the nation’s biggest maker of the alloy, said last week that it plans to replace some of its more expensive rupee obligations with borrowings abroad. JSW Steel, India’s No. 3 maker, said it is seeking to save as much as 1 percentage point in interest costs by reducing debt denominated in the local currency to 50 percent of total, from 60 percent.

A stable local currency is tempering exchange-rate risk and offering savings as companies want the Reserve Bank of India to cut the highest interest rates among major Asian economies and help revive the $1.8 trillion economy. The narrowest swings in the rupee since June 2011 are reducing hedging costs and boosting the appeal of refinancing, said Alan Greene, a Singapore-based analyst at Moody’s Investors Service.

“This is a favorable time for companies to refinance rupee debt by borrowing dollars overseas as the local currency will continue to be stable and steady in the foreseeable future,” said Prabal Banerjee, Mumbai-based president of international finance at Essar Group, a conglomerate engaged in energy, steel and business process outsourcing.

Hungry Market

Essar Oil, the group’s energy unit, said earlier this year that it is “dollarizing” its rupee debt to reduce interest costs and had plans to convert the equivalent of $1.3 billion of its rupee-denominated debt into dollars. Tata Power Co. (TPWR), the electricity utility unit of India’s largest business group, said last month it plans a $205 million, three-year loan to refinance its maturing debt.

Tata Steel sought an approval from shareholders to increase its borrowing limits and to raise debt from international markets.

“The market is hungry for Indian names at the moment,” Moody’s Greene said in an interview. “If the economy is turning around, they should be making better profits and be able to service their debt.”

Steelmakers to consumer-goods manufacturers in India are expecting policymakers to spur the economy as inflation causes interest rates to stay at the highest among major Asian economies. Gross domestic product rose 4.7 percent in the year to March 31, following a 4.5 percent increase in the previous 12 months. Consumer inflation averaged more than 9.5 percent since the start of 2012.

Volatility Slump

Prime Minister Narendra Modi, who was sworn into office on May 26, has vowed to reverse the slowdown, rein in inflation and take unpopular decisions necessary to mend state finances. He has pledged to build 100 new cities, provide houses to all citizens by 2022, introduce high-speed trains and low-cost airports for smaller towns.

His government will present its first budget on July 10.

The rupee has surged 15 percent from an all-time low of 68.845 a dollar reached in August, making it the best rally in the Asia-Pacific region for the period. One-year implied volatility has slumped 399 basis points this year, the most among Asian currencies, to 9.36 percent, according to data compiled by Bloomberg. The gauge was at 9.12 percent on June 27, the least in three years.

“There was too much volatility in the rupee, which was a cause for concern,” Seshagiri Rao, group chief financial officer for JSW, said last month. “The rupee in the range of 58 to 61 is good and a comfortable level.”

Giving Confidence

Indian companies raised $15.1 billion in foreign-currency loans in the first half, the most in such a period since 2011, as borrowing costs abroad fell even as those at home remained at the region’s highest levels.

“This year has seen large refinancing transactions as companies managed favorable rates and extended debt maturities,” Manmohan Singh, Mumbai-based head for debt capital markets for India and South-East Asia at Royal Bank of Scotland Group Plc. “The rupee’s stability and a new government is giving confidence to investors.”

Average costs on rupee-denominated loans exceeded rates on dollar borrowing by at least 8 percentage points amid monetary easing by the U.S. Federal Reserve and the European Central Bank, according to data compiled by Bloomberg.

The cost to protect against foreign-exchange swings is easing as exchange-rate volatility decreases. The price of contracts that fix the conversion rate for buying dollars with rupees in three months dropped 110 basis points, or 1.1 percentage points, from this year’s high of 9.68 percent.

Trailing Estimates

While the benchmark S&P BSE Sensex index comprising 30 stocks of top Indian companies has rallied 21 percent this year on optimism Modi will take steps to revive demand, the slowdown has dented profits. Some are selling some of their assets, while others are refinancing debt.

Sales at 29 of the 30 Sensex companies in the three months ended March was 1.8 percent below analysts’ estimates, according to data compiled by Bloomberg. Four companies, including Maruti Suzuki India Ltd., reported a drop.

Profit margins or earnings as a percentage of sales before interest, taxes, depreciation, and amortization at Tata Steel’s Indian operations were near a 11-year low at 31.1 percent in the year ended March 31, while JSW Steel (JSTL)’s was 17.9 percent compared with 17.1 percent last year, which was the lowest in at least five years.

Tata Steel and JSW Steel are among producers adding capacity even as the pace of consumption declined for a third consecutive year to less than 1 percent in the year ended March 31 as infrastructure projects stalled and local car sales faltered.

“Balance sheets continue to remain stressed so in that sense whatever refinancing-related things can help them in saving interest costs or elongating pay-back periods will be an overall positive,” said Abhisar Jain, an analyst at Mumbai-based Centrum Broking Pvt.

To contact the reporters on this story: Anurag Joshi in Mumbai at ajoshi53@bloomberg.net; Abhishek Shanker in Mumbai at ashanker1@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Sam Nagarajan, Dick Schumacher

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