The rupee depreciation alone knocked off almost a fourth of the total net profit of India Inc in the quarter ended September. An analysis of the results show the cumulative net profit of 2,680 companies was Rs 48,148 crore.
That number could have gone up by at least Rs 15,000 crore but for the amount some companies set aside to account for currency fluctuations, derivative losses and mark-to-market (MTM) losses on foreign currency loans. The cumulative net profit could have been much lower if all companies provided for such loss in the Q2 results, instead of carrying such losses in the balance sheet.
The rupee lost 9.74 per cent against the dollar during the second quarter (July-September).
| DENTED BOOKS Top 10 affected companies by currency fluctuation in Q2 | ||||
| Net profit | Currency loss/profit | |||
| Sept ‘10 | Sept ‘11 | Sept ‘10 | Sept ‘11 | |
| I O C L | 5,293.95 | -7,485.55 | 282.97 | -2,309.59 |
| B P C L | 2,142.22 | -3,229.27 | -39.40 | -907.05 |
| Bharti Airtel | 1,661.20 | 1,027.00 | 0.00 | -683.00 |
| Sh Renuka Sugar | 128.10 | -615.80 | 0.00 | -569.80 |
| JSW Steel | 373.26 | -669.32 | 0.00 | -514.04 |
| S A I L | 1,090.01 | 494.64 | 0.00 | -508.72 |
| Tata Motors | 2,222.99 | 1,877.33 | 127.64 | -438.96 |
| Essar Oil | 130.00 | -166.00 | 115.00 | -407.00 |
| Ranbaxy Labs | 307.94 | -464.58 | 0.00 | -400.15 |
| M R P L | 281.57 | 24.13 | 53.44 | -351.97 |
| All figures in Rs crore | ||||
Experts said the outlook for the third quarter was worse, as the rupee has already depreciated another 6.7 per cent between October 1 and November 25. Rohini Malkani, chief economist, CITI, said, “Our forecasts are that the Indian currency could bounce back to Rs 50/$ not before March 2012, and a 2008-type sharp rebound in the rupee is unlikely this time. Due to lower rupee, inflation is likely to remain elevated, as input costs across all components could see an increase.”
Experts said the MTM losses on account of exchange rate fluctuations on commercial borrowing and interest on the unrealised portion of foreign currency convertible bonds are notional losses, which can be written back when the situation improves. However, the losses on account of exotic derivative products and hedging of export revenues against the fixed rupee-dollar rate are realised and, hence, cannot be written back.
Jigar Shah, head of research at Kim Eng Securities, a Malaysian FII, said, “The rupee depreciation in this quarter has cut earnings of several metal, auto and telecom companies. These companies are negatively impacted due to MTM losses on their foreign currency loans, high import content and currency translation losses.”
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Including notional loss, metal companies, Sterlite Industries, Tata Steel and SAIL, could lose 40-50 per cent of their Q3 earnings if the rupee continues at the current level of 52.25, says Shah. The gains for software companies would be two-10 per cent.
A study by Edelweiss Research says concerns loom large for companies where FCCBs are due for redemption in the near future and, hence, the probability of MTM losses now being realised is high.
Apart from the rupee impact, profits of these 2,680 companies also took a huge hit on account of rising raw material costs and increasing interest rate burden.
Prices of raw materials spiralled as several industrial raw materials are priced at import parity levels or are imported.
Interest rates have also been rising consistently. These two combined with the rupee depreciation were responsible for India Inc’s Q2 net profit declining a whopping 41per cent year-on-year — the biggest in the past several quarters. Excluding oil and gas companies, the decline in net profit has been 23.2 per cent.
The analysis excludes banking and finance companies.
For manufacturing companies (excluding oil and gas), input costs as a percentage of net sales is up by 178 basis points on a year-on-year basis, and has impacted profits by Rs 11,560 crore. Interest cost more than doubled to Rs 31,032 crore.
There is no respite in sight on the interest rate front as well for the next few months. Robert Prior-Wandesforde, Research Analyst with Credit Suisse, said, “a lower rupee means pressure on prices will continue and interest rate cut may be off the agenda in the near future.”