Sometime in late September this year, when the rupee had come off to levels of 50 against the dollar, Crisil had sounded an alert on the foreign exchange liabilities of Indian corporates. The rating agency had pointed out pertinently that not only had Indian corporates borrowed more in recent times, the tenures of the loans too had become shorter. This meant that a large part of these loans would need to be repaid in 2011-12. The September quarter earnings of India Inc told us the real story, namely that there were many companies who had not hedged their foreign exchange exposure, either wholly or in part.
A list put out by Kotak Institutional Equities of companies that reported mark-to-market (m-t-m) losses contained predictably some of the oil marketing companies like HPCL and BPCL, which had m-t-m losses of between R800 – R1,000 crore, but also several others like Sterlite, JSW Steel, Shree Renuka Sugars, Ranbaxy, and Tata Power. Hopefully some of these firms would have realised the folly of betting on the currency and would have done the needful. For those that didn?t, the December quarter is going to be a painful one. The rupee has slipped to below 54 levels and anecdotal evidence suggests there are a few corporate treasurers who haven?t yet protected themselves against the weakening rupee. In July, when the rupee was at 44-44.50 levels, forward premiums were 4% or even less. Between then and now, the rupee has caved in by some 18-19%. What?s more, given that there doesn?t seem to be a convincing resolution in sight for the euro zone crisis, forex experts feel that the dollar could remain strong. There?s little point in blaming the central bank for not holding up the currency; the Reserve Bank has always said it would not intervene in the forex market and does not have a target for the rupee.
Also there has been much criticism that the central bank shouldn?t have expressed its views on defending the currency with reserves so openly; but again, corporate treasurers should know that the currency market is like any other market with its share of speculators. They should not have expected the rupee to rebound in a matter of months the way it did after the Lehman crisis.
Hopefully, the currency will bounce-bank?Crisil estimates the rupee could be back at 48 levels by March end?and not too much damage would have been done. However, it?s a pity that at least some companies may have to take a hit when they repay their loans and the interest thereon. Already, earnings are under pressure with the economy slowing down and foreign investors have been underweight India for the better part of 2011.
The sharp depreciation of the rupee has further hurt their returns; in dollar terms the Sensex has lost around 30% this year. Crisil believes that the Indian currency would bounce back to levels of 48 by March next year. It also feels that foreign investors would once again give the Indian equity markets a look in, partly because prices have corrected and because the rupee has already depreciated. It?s possible there could be further downgrades to corporate profits on account of forex losses.
So although there should be better visibility on the macro environment in the next few months, especially inflation and interest rates, forex losses could depress earnings.