The rupee’s strengthening in recent months, after a sharp decline in the third quarter, will be a bonus for India Inc. The profit before tax for the corporate sector should improve by at least Rs 5,500 crore in the fourth quarter.
The rupee appreciation is expected to benefit oil marketing companies BPCL, IOC and HPCL and refiner MRPL. Some other companies such as, Wipro, MindTree, HCL Tech and TVS’ margins would look better due to a stronger rupee.
The rupee is trading at 50.88 against the dollar, a 4.5 per cent appreciation over December’s 53.27. This will bring mark-to-market (MTM, revaluing securities at current levels) benefits to 243 companies that made provision for currency losses in the third quarter under Accounting Standard-11, due to the adverse impact on forex rates.
The provision was made for: creditor dues denominated in foreign currency, crude oil liabilities, foreign currency option derivatives taken during previous years, interest charges on short-term foreign currency loans and forex fluctuations on imported raw materials, among others.
Amar Ambani, head of research, India Infoline, said, “The fourth quarter will be certainly better for companies on provision for losses due to currency fluctuations, except for those that had hedged their positions lower than the prevailing rates.”
Adding: “However, next year we have estimated the rupee to average at 52 to a dollar and that would increase Nifty companies’ (the leading index of large-cap ones listed on the National Stock Exchange) earnings by four per cent just on account of this.”
The roll back for 243 companies is estimated at Rs 5,500 crore as the rupee recovered over the third quarter. The gain from the appreciation is estimated at 7.2 per cent of the net profit of Rs 76,824 crore earned by 2,669 manufacturing and services companies in the quarter. The net profit of 2,669 companies had declined three per cent in the third quarter, mostly on account of the MTM provision. So, had the rupee remain constant at 48.97, the net profit of sample firms could have been increased by around 10 per cent in the third quarter.
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Nevertheless, for the 243 companies, the MTM losses could turn into MTM gains in the fourth quarter. This is significantly high, as the MTM provision in the quarter accounted for 57 per cent of the net profit earned in that period.
The MTM provision in the third quarter could have been higher by Rs 2,447 crore, but 72 companies had preferred to take advantage of the government notification on December 29, 2011. The ministry of corporate affairs had issued a notification amending the companies (Accounting Standard) rules on reporting of long-term foreign currency monetary items, by extending the time period for the amortisation of the said differences from 'up to March 31, 2012' to 'up to March 31, 2020'.
Emkay Global Research’s Dhananjay Sinha said in a report on the fourth quarter results preview that, “For automobiles, information technology (IT) services, engineering and capital goods sectors, the appreciation of the rupee in the fourth quarter will be positive.” It, however, goes on to add that the impact would differ, depending on hedging.
For the engineering and capital goods sectors, the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin is expected to contract by 170 basis points over a year, to 15.8 per cent. However, forex gains and high other income partially offset this. The report says the metals sector was another beneficiary of a higher rupee in the fourth quarter. From the rupee exchange rate point of view, in the next financial year, IIFL is positive on the automobile, metals, pharmaceutical and IT sectors. It is negative for FMCG, media and utility sectors.