Apart from impacting the raw material front, many firms also have forex loans.
Unlike the past when fast moving consumer goods (FMCG) companies were least impacted by movement in the rupee-dollar rate, the trend is changing. Rising international acquisitions now expose FMCG companies to currency risks, as most of these buyouts are funded via foreign currency loans. Apart from sourcing of imported raw material, prices of many inputs are also linked to global prices, all of which could impact their financials.
Godrej Consumer (GCPL) has the highest foreign currency loans, of around $350 million, followed by Dabur ($169 mn) and Marico ($117 mn). The recent fall in the rupee’s value could mean translation losses on such loans. Since these are carried under reserves in the balance sheet, it affects their net worth, say analysts. The impact would depend on the un-hedged currency positions of such companies.
JM Financial’s analysts, in a September 27 report, note that GCPL has to repay $50-70 mn by March 2012. Though it has hedged part of this, it could see 30 per cent lower net worth accretion in this financial year, due to translation losses on its debt. Although 36 per cent of its revenues come from countries like the UK, South Africa and Indonesia, the dollar has strengthened against most of these currencies, too. Analysts, thus, expect GCPL to post some mark-to-market losses (from the writing down of assets to reflect current values) in the September quarter. GCPL also imports a sixth of its raw materials, but these are hedged till November. So, the near-term impact would be muted. Marico and Dabur, which get close to 25 per cent of revenues from markets abroad, have a natural hedge against a falling rupee. This will help offset the impact on their balance sheets and on raw material costs linked to foreign prices.
Analysts at Goldman Sachs, in a report last month, said Hindustan Unilever (HUL) was the most affected from a falling rupee. About 75 per cent of HUL’s raw material prices are linked to international commodity prices (25 per cent imported, 55 per cent linked to global prices), while exports accounted for 5.5 per cent of revenues. A sustained rupee fall could push up HUL’s input costs by six to eight per cent and, thus, impact profit margins for 2011-12, believe Goldman’s analysts. The net impact, though, would depend on its ability to pass on cost increases or improve on other expenses.
ITC should benefit the most from rupee weakness, as a little over 80 per cent of its inputs in the tobacco business are linked to domestic prices. Given its leadership position in cigarettes (80 per cent of ITC’s profits), along with improving other businesses, ITC remains the top pick. Analysts are also bullish on GCPL, given the growing contribution from recently acquired businesses, and on Marico, due to its strategy of increasing market share, coupled with attractive valuations. While Dabur is set to gain from its growing focus on the food and beverages category, current valuations don’t leave much scope for uptick.