A total of 120 companies were caught on the wrong foot in the quarter ended June 30. They hedged huge amounts and dabbled in exotic derivative products, lulled by the upward movement of the rupee and high GDP projections.
Data culled from the unaudited first quarter results reveal that these companies set aside Rs 8,900 crore for currency fluctuations, exotic derivative products and mark-to-market (MTM) losses to hedge their exports.
These very companies had gained Rs 3,040 crore from such products during the corresponding quarter of the previous financial year.
These companies also saw their net profits decline by 7.1 per cent for the quarter under review compared to a net profit growth of 45.7 per cent in the same quarter of the previous year. They did post a 51 per cent rise in net sales, but the cost of production rose at a higher pace of 57.1 per cent. As a result, operating margins fell by 467 basis points to 12.24 per cent.
The companies took foreign currency loans through external commercial borrowing (ECBs). This increased the cost of funds as the new accounting norms forced borrowers to make provisions for MTM losses following the rupee depreciation.
Besides, the meltdown in the global equity markets hurt FCCBs issuers the most. The investors have postponed their conversion plans as shares of most high premium FCCBs are trading at a huge discount.
Consequently, the FCCB borrowers who preferred annual payments on the coupon rates chose to provide MTM losses on the remaining portion of the convertible bonds.
The companies which went for yield-to-maturity redemption of FCCBs have made a provision in the balance sheet instead of MTM losses in profit and loss account. For example, the FCCBs of Reliance Communication can get covered on or before the due dates of May 1, 2011 and February 18, 2012, but the company has not made a provision for MTM losses of Rs 399.12 crore.
The fear of rupee appreciation due to GDP expectations of over nine per cent for the next three years, too, forced exporters to try exotic derivative products or hedge their revenue stream against the dollar. The rupee, however, depreciated against the dollar, and so exporters provided MTM losses on exports’ revenue and exotic derivative products. However, the MTM losses on account of the exchange rate fluctuations on commercial borrowing and interest on the unrealised portion of the FCCBs are notional losses which can be written back when the situation improves.
The losses on account of exotic derivative products and hedging of export revenues against fixed rupee-dollar rate, however, are realised, and hence cannot be written back.
The MTM losses of the 120 companies show that realised losses on account of derivative products and revenue hedging are modest at Rs 1,700 crore, while the unrealised or MTM losses due to currency fluctuations are higher at Rs 7,200 crore.
This means that MTM losses to the tune of Rs 7,200 crore can be written back to the profit and loss (P&L) account if the situation improves.
Incidentally, an analysis of the results of 1,550 companies for the first quarter ended June 2008 indicates that their aggregate performance is largely skewed on account of derivative losses and MTM provisions by the 120 companies.
If one writes back Rs 8,900 crore in the first quarter net profit for 2008-09 and deducts Rs 3,040 crore from the first quarter net profit for 2007-08, the post-adjustment net profit rises to 32 per cent from pre-adjusted growth of a 5.5 per cent.
The operating margins of these 1,550 companies too fell by 322 basis points to 17.44 per cent, largely on account of MTM losses of the 120 companies.
