Weak euro to impact Indian cos with European arms

Companies with euro debt exposure to pay less to repay loans

Indian companies which export to Europe or have operations there could post lower revenues and profits on their sales in Indian currency terms. The euro has depreciated eight per cent against the rupee in the past month.

For India, Europe is a major trading partner, the second-largest after Asia in 2013-14, accounting for $61.3 billion of exports. Even as the European Central Bank on Thursday pledged to buy government bonds worth euro 60 billion a month, to perk growth in the European Union, analysts warn any weakness in the  growth numbers there would have repercussions on India’s exports and on Indian companies with operations in the euro zone.

On Wednesday, the euro was fetching Rs 71.36, compared to Rs 77.67 a month ago.

“The impact of euro depreciation for Indian corporates can be both positive and negative. For companies having operations in the euro zone, having euro as their “operating currency”, there will be negative impact, as their operating income and profitability will be reduced due to the euro depreciation against the dollar or even rupee, when they consolidate their results in India or any other country,” said Prabal Banerjee, president, international finance, of the Essar group.

  “At the same time, Indian corporates operating in India — same companies or others who have balance sheet exposure in the euro will be benefitted since their net liability in the euro will come down due to euro depreciation compared to dollar or rupee. But for their euro-denominated assets — any realisation will be negatively impacted,” he said.

Analysts at JM Financial said many Indian companies now have significant exposure to the Indian market — which has increased in the last five years.

For example, 56 per cent of Tata Steel’s sales come from Europe and analysts expect the euro depreciation could impact its revenues negatively by eight per cent in 2015-16. Another major Tata company, Tata Motors, earns 82 per cent of its consolidated sales from Europe — thanks to Jaguar Land Rover. Its could see a 12 per cent negative impact on revenues during fiscal 2016. Its earnings per share or EPS could fall by 15 per cent.

Analysts at JM Financial say companies with foreign subsidiaries like Tata Steel, Tata Motors, Apollo Tyres, Motherson Sumi will face negative impact on account of translation losses even as a marginal impact on account of adverse currency movement will be felt by other companies in the engineering goods, metals, pharma and automobile sector.

But companies, which have taken loans in the euro, could be in for a windfall. Companies like Bharti Airtel, which have raised euro loans, will pay less in Indian currency.

Just last week, the Indian companies with Swiss currency loans received a jolt as their repayments rose after the Swiss central bank decided last Thursday to stop capping the currency’s value. Many Indian companies, including Bharti Airtel and Bharat Petroleum Corporation, have exposure to the Swiss currency along with an assortment of Indian banks and saw their repayments going up.