The global economic crisis is starting to weigh heavily on India’s balance sheet, as the rupee depreciates. While a weakening rupee may bring joy to export-oriented sectors such as IT and textiles, it has pushed up the foreign exchange liabilities of Indian companies.
The accounting rules, known as the AS-11 clause, make it mandatory for companies to make a provision at market value in their profit & loss accounts for any changes in foreign loans. bad. The hardest hit are companies that mainly serve the domestic market and choose to borrow foreign currencies to finance their growth plans.
According to the ETIG analysis, the profitability of companies will be affected by the loss in market (MTM). Tata Steel could report an exchange rate loss of around Rs 344 crore, while Tata Motors could hit Rs 311 crore. Tata Chemicals, which has borrowed $475 million in foreign currency to finance its overseas acquisitions, is estimated to report an exchange rate loss of Rs 187 crore. Ranbaxy, JSW Steel and Firstsource Solutions will lose Rs 100 crore and Rs 400 crore each. The list of companies is not exhaustive as it is estimated that about a dozen companies increased their foreign exchange debt last year.
Thankfully, this is just a bookkeeping entry and doesn’t affect cash flow. However, it is likely to be read negatively by the stock market. Market participants actively monitor the company’s net profit and any adverse developments affect the valuation. The rupee had a positive impact on most of the aforementioned companies until last year, but it depreciated by more than 9% in the quarter ended September 2008.
When the rupee depreciates, the value of foreign currency debt in rupee terms increases and vice versa. Under AS-11 regulations, the increase in liabilities must be reflected in the quarterly profit and loss statement and will translate into lower corporate profits. Most companies are focused on the domestic market and therefore are unlikely to benefit from the weakening rupee.
A falling rupee will severely affect small companies, while large companies will only be moderately affected. Firstsource Solutions could post a net loss, while Tata Steel could see a 100 basis point drop in net profit margins due to exchange rate losses. To put things in perspective, most companies will experience a 10-50% hit to their operating profit.
Companies like Reliance Communication, Reliance Industries, and Bharti Airtel follow the Companies Act-VI route, rather than AS-11, and are therefore unlikely to affect their quarterly profit and loss statements. The operating profit of the two Reliance companies would be around Rs 800-900 lower if they signed up under the AS11 norm.