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India Inc tries to second-guess Re movement

BS Reporters/Mumbai/ New Delhi 24 May 12 | 12:51 AM

India Inc is suddenly talking about the falling rupee, given the extent of its slide.

The depreciation is negatively affecting importers the most. For example, if an importer booked a product at, say, $1 in December when the rupee was at 51 to a dollar and made the payment at the time of delivery in May, when the rupee was at 55 to a dollar, he has incurred a loss of Rs 4, or about seven per cent.

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The opposite is true for exporters, who are making merry. Sectors such as information technology (IT) and pharmaceuticals are positively affected, as most of their earnings are in dollars. Steel and automobiles are among those negatively affected, because of their dependence on imported raw material.

Shekhar Vishwanathan, deputy managing director (commercial), Toyota Kirloskar Motors, said, “We can do little to arrest the hit on our finances due to the sharp depreciation. We are 35-40 per cent import-dependent, because of which our import bill has been on a rise. For every rupee depreciation, we lose as much as Rs 90 crore." Toyota imports as much as 40 per cent of its components, largely from vendors in Japan and Thailand.

The impact on steel makers and auto companies could force them to revise price upwards yet again. Jnaneswar Sen, senior vice-president, sales and marketing, Honda Siel Cars India, said, “If this phenomenon continues beyond a certain period of time, then we will have to relook at our price position."

For steel makers, the impact comes in the form of imports of a major raw material, coking coal. All of them import it and the rupee fall inflates their bills. This will pinch more because the coking coal price was at an all-time peak last year, at $320 per tonne. In the fourth quarter of 2011-12, prices came down to around $215 per tonne. Just when steel makers were hoping to improve their margins because of this fall, the rupee began sliding.

Koushik Chatterjee, chief financial officer (CFO), Tata Steel, said, “In relation to revenue imports like coal, which we import partly, this is certainly a cost-push element."

Tata Steel’s Europe subsidiary contributed $16.15 billion (Rs 82,153 crore) to its revenue for the year ended March 31, against $6.67 bn (Rs 33,933 crore) from India operations. The rupee depreciation is a natural hedge, as most of the European subsidiary’s dealings are in dollars and pounds. The company used an exchange rate of 50.87 to a dollar for its conversions.

Seshagiri Rao, joint managing director and Group CFO, JSW Steel, said, “In the beginning of the year (FY12), it was Rs 44.50 to a dollar as against Rs 53.27 to a dollar on March 31, 2012. This is close to 20 per cent depreciation on a point-to-point basis. But, if I see the impact on the profit and loss account, in the last quarter (of 2011-12), there is a gain of Rs 199 crore. But for the year (FY12) as a whole, net loss on rupee depreciation to the tune of Rs 800 crore has been booked."

If there is any sector that is laughing its way to the bank in this environment, it’s the IT and pharma sectors. The IT sector will benefit from this rupee depreciation to the dollar, as every one per cent fall has a positive impact of 40 basis points on the margins. But Indian IT services also bill clients in currencies like the euro, pound, Australian dollar and yen."In the short term, the rupee depreciation to the dollar is a positive. But it’s a double whammy. Our travel costs are going up. If the rupee continues to be at these levels, then chances of customers asking for pricing discounts could also become a reality. If the rupee continues to depreciate, it will also impact the hedging strategy of firms," said Sujit Sircar, CFO, iGate.

"At this point, we are not taking any new hedging covers, as the rupee-dollar movement is changing every day. Though we might gain due to the rupee falling, we will have a negative impact if the US dollar depreciates to the Philippine peso. About 15-16 per cent of our revenue comes from Philippines," said Partha De Sarkar, chief executive, Hinduja Global Solutions.

It’s similar with the pharmaceutical industry. R V Desai, executive director & chief financial officer, Glenmark Pharmaceuticals, says: “The depreciation will be largely positive for the industry as a whole, given the sector’s high exposure to exports. For Glenmark, too, the overall impact will be positive, as a large portion of our revenues are dollar-denominated. But the falling rupee is detrimental to the growth of the economy and will also lead to high inflation."

Most Indian generic drug manufacturers have high exposure to the US, the world's largest pharmaceutical market.

Imported coal-based power projects are already getting affected due to the rupee depreciation. Yesterday, Tata Power took a hit due to the impact of forex losses incurred due to the rupee depreciation on its ultra- mega power project at Mundra. The additional provision made for impairment is as high as Rs 815 crore. Power projects under construction will face project cost escalation, too, as almost half the equipment used is imported. Even domestic equipment makers import some parts, raising project costs.

“Power projects could see 10-12 per cent increase on project costs due to the impact," said Pradeep Lenka, chief executive of Aditya Birla Power.

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