Companies with external borrowings stand to gain

Rohit Joshi and Ajay Vaishnav/ZRG

Substantiating early signs of recovery of Indian economy, the Indian Rupee (INR) has appreciated nearly five percent against the US dollar (USD) in the July-September quarter. It has appreciated against major foreign currencies on the back of key economic reforms cleared by the cabinet. The last quarter (April-June) of the current fiscal (FY13) saw many Indian companies incurring huge forex losses due to depreciation in rupee. The strengthening of rupee against the dollar should now help these companies to stem their forex losses.

But, most companies dependent on external borrowings don’t attach much significance to the movement of currency in forex market. That’s because the gains or losses accruing from there are notional. Further, fluidity in market can be hedged with financial tools. Nonetheless, gains on account of rupee appreciation do contribute to feel-good factor in a company’s balance sheet.

Sunil Kanojia, group president, Sintex Industries, concurs, “Yes, mathematically the hypothesis is correct. Auditors every quarter calculate the forex loss/gain depending on the exchange rate. Rupee appreciation would help those companies having foreign borrowing as well as those which import raw materials. However, these are notional losses as actual losses are calculated on the date of redemption.”

The biggest gainers would naturally be companies with external borrowings, says A K Prabhakar, senior vice-president, equity research at Anand Rathi Financial Services. “Rupee appreciation would benefit companies with foreign borrowings as it will help them to reduce the forex losses which they have been facing for last few quarters,” Prabhakar stressed.

That Prabhakar is spot on in his analysis has been proved with Sintex reporting lower forex losses in the second quarter of the current fiscal (Q2FY13). In fact, the company’s bottom line has posted a robust growth of 86 percent on account of reduced forex losses which now stands at Rs 4.86 crore as compared to Rs 59.6 crore in the corresponding quarter last year. This is when Sintex’s loss on Foreign Currency Convertible Bonds was Rs. 29 crore in the first quarter of current fiscal (Q1FY13). Yet Sintex’s profits have declined by 22 percent on yearly basis after adjusting these losses.

Likewise, other Indian companies such as Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), Ranbaxy, Essar Oil, Sterlite Industries, Suzlon Energy, Tata Motors, Aurobindo Pharma, Jain Irrigation, India Glycols, Educomp et al too had earlier suffered on account of depreciation in rupee in Q1FY13.

In fact, the weakening of rupee against dollar caused massive forex losses to these companies and ate into their profits. Oil Marketing Companies especially have been at the receiving end. Take for instance, IOC incurred forex losses in tune of Rs 3180 crore while BPCL’s was at Rs 1611 crore. Others like Sterlite Industries, Aurobindo Pharma have incurred Rs 217 crore and Rs 207 crore respectively.

The foreign borrowings on the balance sheet of these companies as on March 31, 2012 stood at: IOC (Rs 32,900 crore), Sterlite Industries (Rs 3,269 crore), BPCL (Rs 20,340 crore), Sintex Industries (Rs 1,151 crore), Aurobindo Pharma (Rs 1,112 crore).

The significance of foreign exchange in stressing a company’s balance sheet can be discerned from Aurobindo Pharma’s case. The company’s net debt stood at Rs 3,025 crore at the end of FY12 which by the end of Q1FY13 has increased to Rs 3,400 crore. The rise in the level of debt is mainly attributed to depreciation in the rupee against the US dollar. A substantial portion of Pharma company’s debts (near 90 percent) is US dollar denominated.

Cautioning investors, Prabhakar at Anand Rathi advised, “Investors should not get carried away with the expected foreign gains as it is notional. It shouldn’t be the only criteria to invest. Forex losses or gains is a temporary phenomenon and will always be there due to rupee volatility. It is necessary to see the business operations and the outlook for the same as forex gain is the other income component which will not impact so much as much the growth of the core business of the company.”

While consolidating the core business is imperative, the role of a conducive and enabling economic environment provided by a willing government cannot be underestimated. It affects forex markets as well. Kanojia at Sintex avoided comment on how rupee will trade in Q3FY13. But he, nonetheless stressed, “Going forward, rupee movements would largely depend on the reforms spree.”