Weak rupee takes its toll on cos with huge foreign debt

The global economic crisis weighs heavily on India Inc.’s balance sheet due to the depreciating rupee. While a weakening rupee could boost export-oriented sectors such as IT and textiles, it has boosted Indian companies’ foreign exchange liabilities.

Accounting standards, referred to as AS-11 provisions, require companies to make mark-to-market provisions in their income statements for changes in foreign currency loans. The hardest hit were companies that mostly serve the domestic market and have opted for foreign currency loans to finance their growth plans.

According to an analysis by ETIG, companies’ profitability is affected by mark-to-market (MTM) losses. Tata Steel could report a foreign exchange loss of around Rs 344 crore while Tata Motors could see a loss of Rs 311 crore. Tata Chemicals, which has taken out a US$475 million foreign currency loan to fund its overseas acquisitions, is estimated to report a foreign exchange loss of Rs 187 crore. Ranbaxy, JSW Steel and Firstsource Solutions will lose Rs 100 crore and Rs 400 crore respectively. The list of companies is not exhaustive as it is estimated that a dozen companies took on foreign currency debt in the past year.

Luckily this is only an accounting entry and has no impact on cash flows. However, it is likely to be read negatively by the stock market. Market participants actively track companies’ net earnings, and any adverse development impacts valuations. The rupee was positive for most of the above companies up until last year, but it has depreciated over 9% in the quarter to September 2008.

When the rupee depreciates, the value of the rupee-denominated foreign currency liability increases and vice versa. Under AS-11 regulations, an increase in the liability should be reflected in the quarterly income statement and result in lower corporate earnings. Most companies are focused on the domestic market and as such are unlikely to benefit from a weakening rupee.

The falling rupee will hit small businesses hard, while large ones will be only moderately affected. Firstsource Solutions may report a net loss, while Tata Steel could see a 100 basis point drop in net profit margin on FX losses. To put things in perspective, most companies will see their operating profits fall by 10-50%.

Companies such as Reliance Communication, Reliance Industries and Bharti Airtel follow Schedule-VI of the Companies Act rather than AS-11 and as such are unlikely to see any impact on their quarterly income statements. The operating profits of the two Reliance companies would have been about Rs 800-900 crore lower if they had subscribed to AS11 norms.

https://economictimes.indiatimes.com/markets/forex/weak-rupee-takes-its-toll-on-cos-with-huge-foreign-debt/articleshow/3546158.cms Weak rupee takes its toll on cos with huge foreign debt

Russell Falcon

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