Corporate India is bracing for another difficult earnings season. Apart from slowing growth, the rupee’s downward journey will claim several victims, as India Inc’s exposure to the dollar has risen substantially over the past few years. Whether it’s servicing the foreign currency loans or paying for imported raw materials and fuel, the rupee’s fall means higher costs.
Exporters who have not substantially hedged their receivables will benefit from the rupee’s fall against the dollar, but those with unhedged foreign currency loans and foreign currency convertible bonds (FCCBs) will bleed. As many as 56 companies will need to cough up $5 billion for their FCCBs that mature this year. V Ashok, chief inancial officer of Essar Group, said “Volatility is a big worry as such a sharp move makes planning difficult. Given the nature of the group’s businesses, we have a natural hedge against currency risk. But the macro situation is a greater worry than the rupee’s slide and that needs to be addressed.”
Analysts say most forex loans of companies are not hedged. These companies could see high mark-to-market (MTM) losses. Deepak Jain, analyst at Sharekhan, says companies, which have not hedged their forex payouts, will book huge MTM losses this quarter.
The traditional theory says when the currency falls, export-oriented businesses do well. However, Dhananjay Sinha, strategist at Emkay Global, says that with the world economy slowing, exports are under pressure. Export growth, according to port volumes, is contracting. “What matters in the end is top line growth and that’s going to come under pressure,” he says.
Among all the sectors, the obvious beneficiary of the fall in the rupee is the technology sector. According to Deutsche Bank’s analysis, for every one per cent change in the rupee, the net income of top-tier Indian vendors is expected to improve by 50-110 basis points. However, the problem is not merely the dollar this time around. What makes the situation complicated is the fall of other currencies against the dollar, which will erode some of the benefits. For instance, analysts see a 100-basis point negative impact on revenues of top-tier IT companies due to the cross-currency movements (the dollar has appreciated against the euro and the Australian dollar).
Those who either have a natural hedge against the rupee (through exports) or have hedged their dollar exposure by buying hedges will be better off. For instance, Godrej Consumer Products has one-third of its revenues coming from its global business. It also has a $305-million unhedged forex loan. Though it is adequately hedged in the short-term, the overall impact will be slightly negative on some MTM losses. According to the company’s A Mahendran, “While export earnings will see an uptick, overall there will be an impact of the rupee in the quarter but it is within our plan and can be accommodated.”
In the auto sector, for instance, Bajaj Auto has hedged its exposure and, therefore, there will be no negative surprises. Maruti Suzuki, too, has hedged 40 per cent of its exposure and analysts don’t expect the rupee’s movement against the dollar or the yen to erode profitability in the first half of FY13.
If the rupee continues to swing wildly, there would be an impact in the second half of the fiscal. Hero MotoCorp is a net importer and has not hedged its net exposure. Therefore, it could be hit due to the adverse movement of the rupee against the dollar and the yen.
