Bharti Airtel: Forex fluctuations may hurt

Stock price to remain volatile as rupee continues to lose against major currencies.

The rupee has been on a losing streak. The currency has fallen by 4.05 per cent since September 2 and 8.07 per cent since August, which will impact the second quarter numbers of Bharti Airtel. While a depreciating rupee is good news for information technology companies, as they earn revenue in dollars, it spells trouble for companies having large foreign currency debt. Not surprising, Bharti Airtel’s stock has fallen nearly five per cent over the last two days.

Analysts believe the company’s large foreign currency debt ($11 billion) and other payables make it vulnerable to currency movements, even as translation losses are not routed through the profit and loss statement. Analysis of the company’s annual report by Kotak Institutional Equities suggests only 16 per cent of its total gross debt of Rs 62,100 crore at the end of FY11 was denominated in INR (Indian National Rupee), with the rest being non-INR.

“A majority (Rs 45,400 crore) of this non-INR gross debt of Rs 52,000 crore was in the US dollar, with the Nigerian naira (Rs 3,500 crore) and Japanese Yen (Rs 1,700 crore) contributing a bulk of the rest.” Apart from debt, the company has foreign currency exposure in the form of equipment payables. While equipment payables stood at Rs 6,500 crore at the end of FY11, trade creditors stood at Rs 5,600 crore.

Analysts claim the annual report specifies an impact of Rs 523 crore at the profit before tax level, if there’s a five per cent movement in the rupee, and a Rs 103-crore impact by a five per cent movement in the Japanese yen. The exact impact can be determined on the basis of where the exchange rates are on September 30. Given the rupee is down 8.07 per cent since August, analysts expect a quarter-on-quarter hit of Rs 660 crore.

But, analysts claim that under the International Financial Reporting Standards accounting system, such forex losses have no impact on the profit and loss account, as they are adjusted against reserves. Bharti has reserves of Rs 37,000 crore. However, according to Credit Suisse, every one per cent depreciation in the rupee reduces its book value by 0.9 per cent due to the accounting treatment. Thus, it sees the company’s book value reducing by 4.5 per cent during the quarter, thanks to the currency movement so far.

Credit Suisse also maintains the company’s foreign currency debt is largely unhedged. “By taking unhedged foreign currency debt, we believe Bharti is managing to keep its annual interest costs lower by $725 million. However, this could lead to share price volatility.” Given the company has such a high foreign currency-denominated debt, a fall in the rupee not only implies marked-to-market losses, it also impacts interest payouts.