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India Inc had got some relief when the rupee moved up from Rs 53.07/dollar to Rs 50.88/dollar in the fourth quarter of 2011-12. However, those gains have been wiped out completely because the depreciation in the April-June quarter (from Rs 50.88/dollar to Rs 57.16/dollar) has been far greater. So don’t be surprised if several companies report forex related mark-to-market losses in the first quarter of 2012-13.
Differentiate between real and notional
Before you press the panic button, you need to understand how forex losses impact a company’s bottom line. “Forex related losses have differing impact on different companies,” says Dipen Shah, head of fundamental research, Kotak Securities. The forex losses reported by companies can be ‘real’ as well as ‘notional’. Instead of clubbing all such losses under one head, you need to differentiate between the two.
Most of the companies that report forex related losses (and gains) are exporters who have taken positions in the forex market to hedge their future dollar earnings. For example, IT companies have forex related gains and losses in almost every quarter (depending on the rupee movement in that quarter).
While these exporters have to report mark-to-market losses in their hedging book in this quarter, this should not be treated as real losses. Why? Let us explain with an example.
Assume that an exporter has $100 million export earnings in a quarter and has hedged the full value at Rs 51 per dollar. Since the exporter can settle this transaction by giving delivery of goods, he is not making any real loss here. What he loses in hedging will be made up when he gets paid for the goods supplied.
However, this also means that the exporter will not get any additional benefit from the rupee depreciation. If he had not sold $100 million in the forward market at Rs 51 per dollar, he would have got Rs 57 per dollar.
“Exporters with hedged position will not be able to take advantage of the weakening rupee and, therefore, it is an opportunity loss,” says K. Subramanyam, assistant vice-president, institutional clients, Asit C Mehta Investment Intermediates.
The situation remains more or less similar even if the exporter hedges the full year’s export earnings. While one quarter’s earnings can be settled by delivery, he will have to make provisions for the hedged positions of the remaining three quarters. The exporter will have to report it as a mark-to-market loss in his books.
However, the impact will only be temporary and he will benefit from the weakened rupee once the hedged positions expire. Also, if the rupee strengthens against the dollar in the coming quarters, those losses will become gains. But such mark-to market gains are also notional.
But this is not the case with companies that have foreign exchange liabilities—especially for companies that have not hedged their forex exposure or do not have a natural hedge in the form of export earnings.
“For exporters, it may be more like an opportunity loss, but for companies with un-hedged forex liabilities, it is a real loss,” says Ambareesh Baliga, COO, Way2Wealth Securities. Some of these companies may try to avoid reporting it in this quarter’s profit and loss account by capitalising and, thereby, directly taking it to the balance sheet. However, the loss still remains and they have to ultimately pay when these loans come for repayment.
The biggest impact of the rupee depreciation will be felt by companies that have taken foreign exchange loans during the last phase of the 2003-8 bull market. A large chunk of these loans are now due for conversion or redemption. More than $3 billion (Rs 17,150 crore) worth of foreign currency convertible bonds (FCCB) are coming up for redemption over the next three months (see chart) . Since the stock prices of these companies are quoting well below the proposed conversion prices, the lenders may not opt to convert, but instead demand their money back.
While the stock market has already punished the companies with un-hedged forex loans for this ‘real loss’, the market was not willing to reward the exporters. Even though the rupee depreciation benefits them, not all exporting companies have witnessed a big rally. There are several reasons for this.
First, export sectors like textiles are already facing a severe demand contraction and therefore, good performance can come only from more stable sectors like IT or pharma. Second, the exporters with hedged positions are not able to reap the entire benefit of rupee depreciation.
“A weak global environment and a weakening rupee can encourage clients to ask for billing rate cuts,” says Ankur Rudra, sector lead, Ambit Capital.
Only the pharma sector is in a position to reap the maximum benefit from the fall in the rupee. The sector caters to the basic needs and its global demand is quite stable.
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