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Rupee Drop Imperils $670 Million Solar Projects

According to reports, the rupee’s 9 percent slide this quarter to a record may reduce returns for $670 million of solar power projects in India as higher import costs hurt developers grappling with a rise in panel prices.

Purchases could be postponed as equipment such as panels and inverters comprising 60 percent of the expenditure to build a plant is either imported or based on U.S. dollar prices, said Gaurav Sood, managing director of Solairedirect SA’s local unit. Ajay Goel, chief executive officer at Tata Power Solar Systems Ltd., said as much as 80 percent of module components such as anti-reflective glass have few or no local substitutes, raising costs.

“This is a challenge we face today,” Sood said in an interview. “We are hoping the rupee appreciates soon, or else with fixed tariffs, project returns would suffer.”

A weaker rupee is adding to the risks faced by renewable energy companies to paint makers in an economy expanding at the slowest pace in a decade. The currency, the worst performer in Asia since end-March because of the nation’s unprecedented current-account deficit, also increases financing costs on foreign currency debt, said Bharat Bhushan, a New Delhi-based analyst with Bloomberg New Energy Finance.

Welspun Energy Ltd., India’s biggest solar developer, Moser Baer India Ltd. (MBI), Lanco Infratech Ltd. (LANCI) and Azure Power India Pvt. are among winners of licenses this month to build a total of 250 megawatts of plants that generate electricity from the sun’s rays. They have 13 months to complete the projects, failing which they face penalties.

Apart from these contracts, at least an additional 250 megawatts of capacity due mid-2014 is coming up in other states, taking their combined worth to about 40 billion rupees ($667 million), according to data compiled by Bloomberg.

The rupee touched an all-time low of 59.98 a dollar yesterday, according to data compiled by Bloomberg. Moser Baer shares have slumped 40 percent this year, compared with a 3.8 percent decline in the benchmark S&P BSE Sensex index, while Lanco has dropped 46 percent.

Project developers who raised overseas debt will face an increase in hedging costs and also have to repay more in rupee terms, said Bloomberg New Energy Finance’s Bhushan.

“If the rupee is expected to appreciate, then delaying imports and loans is better,” he said. “If it is expected to depreciate further, buy as soon as possible or wait until it appreciates.”

Projects that have already been completed face a “prominent risk” as loan repayments come up if they haven’t hedged their borrowings, Vineet Mittal, managing director at Welspun Energy, said in an e-mailed response to questions. India has completed almost 1,700 megawatts of solar capacity, according to the Ministry of New and Renewable Energy.

The rupee has plunged at a time when solar panel prices have reversed an almost two-year decline to rise 12 percent since January, dealing a double blow to the companies, according to data compiled by Bloomberg.

Moser Baer, India’s biggest maker of solar panels, said net loss widened 44 percent in the year ended March 31 to 4.59 billion rupees as an oversupply from Chinese manufacturers pushed prices down. Lanco, which also has thermal and wind power units, reported a 10-fold surge in loss in the same period as India’s $1.8 trillion economy grew 5 percent, the smallest gain since 2003.

“Imports delay would be a very tactical move, but there’s no guarantee the rupee is going to appreciate any time soon,” said Inderpreet Wadhwa, chief executive officer of the World Bank-backed Azure Power. “If there’s no risk management in place, returns are certainly going to be impacted.”

The median forecast of 41 estimates of analysts and strategists shows the rupee will strengthen 8.5 percent to 55 a dollar by the end of this year.

The drop in the rupee will have a “big impact” on the country’s paint makers as imports account for about 40 percent of expenses, said Ramakanth Akula, president of the Indian Paints Association. The industry relies on ingredients such as titanium dioxide from suppliers including Dow Chemical Co. as domestic companies meet only 10 percent of the demand, he said.

“The situation is very precarious,” Akula said. “This will be a big hit on the bottomline of most paint companies,” and may force them to raise prices if the exchange rate exceeds 60 rupees a dollar, he said.

The Reserve Bank of India should intervene by selling dollars to stem the decline, said Azure Power’s Wadhwa. The rupee temporarily pared losses yesterday amid speculation the Reserve Bank of India intervened in the currency market to curb exchange-rate losses.

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