India Inc cushions itself against falling rupee

India Inc is unfazed by the sharp fall of the rupee against the greenback as most big firms have already hedged their foreign exchange exposures.

Sumant Sinha, CFO, Aditya Birla group, said big companies were by nature very conservative, and they had got their foreign exchange exposures covered. This means the recent depreciation of the rupee will not impact big industrial houses.

"A few small companies that have not covered their forex exposure might be affected. On the other hand, the depreciation of the rupee will help exporters," he said.

R Shankaraman, vice-president (finance), Larsen & Toubro, said companies had learnt to live with volatility in the foreign exchange market, and manage the risk.

"No one is possibly fully hedged or unhedged. You manage your currency risk differently at different points of time, depending on your export earnings and import requirements," he said.

The rupee has lost over 5 per cent since the beginning of the financial year. In the first week of April, the India unit was trading at 44.60 to the dollar. The currency today strengthened against the dollar, and recovered a part of lost ground to end at 46.78 to the dollar. It had pierced the 47-level on Wednesday.

Some estimates, however, say Indian companies are sitting on as much as $30 billion of unhedged foreign currency liability, and a sharp appreciation of the dollar against the rupee will dent their bottom line.

A foreign exchange dealer said a substantial portion of corporations' foreign currency exposure taken in form of FCNR(B) loans from domestic banks could be unhedged as most of the companies were betting on an appreciating rupee.

"Corporate India's total FCNR(B) exposure could be about $10 billion. Now, they are looking for cover as the outlook on the rupee has changed," the dealer said.

Data culled from Capitaline Plus shows that 340 listed companies have secured and unsecured foreign currency loans worth Rs 54,972 crore on their books.

The list of top private sector companies with foreign currency loans of over Rs 500 crore includes Tata Power (Rs 1727.7 crore), Reliance Industries (Rs 1150.53 crore), Hindalco (Rs 910.23 crore), Reliance Energy (Rs 800.18 crore), Dr Reddy's (Rs 689.3 crore), Lupin (Rs 629.01 crore), Asahi India Glass (Rs 592.3 crore), and JSW Steel (Rs 555.02 crore). However, most of them have hedged their exposures by taking forward cover.

As per AS 11 of the ICAI guidelines, corporate entities need to revalue their monetary assets and liabilities "" foreign currency outstanding loans, current assets and current liabilities and fixed assets.

At the end of every quarter, they are expected to revalue the assets/liabilities at the closing rates of the quarter. The impact on revaluation is debited or credited to the profit and loss account under the head "exchange difference," normally clubbed under other income/other expenses.

A depreciating rupee helped technology majors TCS and Infosys Technologies boost their earnings, and offset the impact of visa costs and rising wage costs on operating margins. According to Nandan Nilekani, MD and CEO of Infosys, the depreciation of the rupee has contributed to the revised guidance of the company.

While announcing the company's quarterly results, its Chief Financial Officer V Balakrishnan had said: "If one looks at this quarter, this is the first time that both the customer markets and the currency markets were in our favour. The rupee depreciated by around 3.6 per cent against the dollar during the quarter, and by around 8-9 per cent against the euro.

"We do not know exactly at what point of time the forex covers have been taken, but on the whole it is a clear fact that for every change in the rupee, there are gains on the operating profit margins," he added.

TCS has posted a forex appreciation of 3.2 per cent, or Rs 119 crore, during the quarter. Wipro, however, suffered a revenue loss of Rs 27.2 crore on account of the depreciation of the rupee.

"We had a disadvantage on our operating profit, which saw a loss of 40 basis points because of the rupee depreciation. Though we have hedging in place, when the rupee depreciates, we don't get the benefit in the quarter," said Suresh Senapathy, executive vice-president and chief financial officer, Wipro.

The company has hedged $410 million for foreign exchange volatility in the range of Rs 44.90-46 against the dollar. "As of June 30, 2006, forward contracts and options to the extent of $144 million have been assigned to the foreign currency assets," a Wipro statement said.

Manufacturing companies which do not have export earnings will be at a disadvantage now as they will necessarily need to spend on forward covers which have been left unhedged by some of the companies.

"We are advising importers to hedge their short-term imports. For instance, the forward cover for August is 4 paise. With the rupee trading at 46.80 to the dollar, the all-inclusive cost of the dollar will be less than Rs 46.90. Isn't it safe to hedge your bet instead of keeping it open and paying more than Rs 47 per dollar if the depreciation continues?" asked one dealer.