While Indian corporates have seen only a modest impact from the rupee’s depreciation so far, experts warn that risks are mounting, and a further weakening of the currency could hurt companies.
Rupee has been under pressure since last one week. On Friday, it fell 6 paise to close at 79.04 against the dollar, reaching a new low. Year-on-year, the rupee has depreciated by 5.95% against the dollar, and many brokerages expect it to weaken further in the near term.
“The data till FY 2012 shows that Corporate India was in good shape. Even though the fiscal fourth quarter (Q4) numbers were down, the full-year balance sheet was relatively out of date, and had good delivering. So you don’t see much pressure because the rupee has depreciated. However, you can see that happens going forward,” said Vivek Jain, director, corporate ratings, India Ratings & Research.
“Commodity prices were at a peak in Q4, and in terms of commodities, whatever the companies bought in the quarter would pass through the system in the first quarter, and you also had depreciation of Rs. So Q1 numbers may close as expected,” Jain said, adding that while there are no significant signs of trouble, risks are building.
While experts believe the sharp depreciation in the rupee is a major headwind, corporates, who have burnt their fingers with forex mismanagement earlier, are better covered today.
Nishit Master, Portfolio Manager, said, “Indian corporates reduced their borrowings substantially compared to the last time, when the rupee depreciated sharply and many of them posted large mark-to-outs on their overseas borrowings. The market had taken a loss.” Axis Securities.
Pramod Menon, Group Chief Financial Officer, RPG Enterprises said that corporates now have access to better products to manage currency risks and better awareness of forex risks.
“The understanding of forex management is deeper than it was a decade ago. RBI has also, through various relaxations, brought in flexibility in taking forward cover. There are products that are available without taking significant risks, which are facilitated Gone,” Menon said.
Menon said that in RPGs, more than 90% of a group’s currency exposure is covered as part of the group’s risk-management practices.
Currency depreciation, while negative for importers, benefits exporters, and thus, different sectors will see different effects. Companies with higher risk in foreign trade will see more impact.
“The majority of rupee depreciation will affect companies with high global risk. A depreciating rupee will increase imported inflation, and businesses that import their raw materials, such as chemicals and electronics, will be adversely affected. On the other hand, export-oriented sectors like information technology and pharma will help in reducing the depreciation of the rupee. Most of these businesses have forward cover for their requirements and will be able to protect their margin turf to a great extent,” said Aishwarya Dadhich, a fund manager at Ambit Asset Management.
To be sure, while depreciation tailwinds may help some sectors in the short term, companies expect any margin boost to be only short-term.
“In the short term, it may be positive for margins, but in the long term, margins will become rational. In sectors like IT, we have seen in the past that customers ask for rationalization of pricing,” said RPG’s Menon.
He added that in other commodity-driven sectors, depreciation will put pressure on margins as companies may find it difficult to pass on price hikes.
“We have an entity that is a net importer, and any currency depreciation affects us. The depreciation of the rupee has pushed up raw material prices. All commodities, whether crude or rubber, are already at higher levels; This leaves us with little room to further absorb any increase in prices,” Menon said.