INDIA INC RUNS FOR COVER
With the rupee falling below the psychological barrier of 69 to a dollar on Thursday, companies are taking cover on unhedged positions to reduce further losses. The Indian currency has lost 7.1 per cent of its value against the US one since January, making finance heads redraw their foreign exchange (forex) strategy.
According to an estimate, almost 65 per cent of corporate India’s forex exposure is unhedged. Any further depreciation will lead to deterioration in the credit profile of 75 of the top 100 non-financial companies, say analysts.
“Many companies are taking cover now as Barclays has predicted a fall to ~72 versus the dollar by year-end; DBS Bank expects ~71 to a dollar by June next year,” said the finance head of a large conglomerate. Higher forward cover means higher costs and this was why many companies were avoiding taking a cover till now.
Top companies with significant export income are continuously raising debt from abroad to refinance earlier loans and, in the process, cut costs.
Companies with export income say they are not worried. The chief financial officer of a leading pharmaceutical company said the falling rupee would boost its shipment; almost half their revenue is from export. “But, for companies which draw their revenue from the domestic market, it would be a dampener,” said the executive. For, one has to also factor in the rise in import cost of bulk drugs (primarily imported from China), with payment made in dollars.
Many companies are planning to pass on the higher cost to consumers. Harkirat Singh, managing director of Aero Group, which owns the Woods and Woodlands brands, said: “The impact might not be felt this season, as raw materials have been bought already. For the next season, the company might have to look at higher pricing in the domestic market, to offset for higher input costs.” Of their total leather requirement, around 60 per cent is imported; it also imports fabrics and chemicals.
Adding: “RBI has not taken concrete steps to boost the economy or to ensure that smaller exporters are protected against currency fluctuation.”
The depreciating rupee is a cause of concern of Indian carriers. That's because aircraft lease rents, maintenance costs, salaries of expatriates, interest cost on dollar debt, and ground handling and parking charges abroad are paid in dollars. The dollar-linked costs of airlines would be 60-70 per cent taking into account the fuel costs.
Besides, most of the Indian airlines’ do not have substantial foreign earnings, as their international operations are limited. Air India and Jet Airways have a natural hedge, as the two airlines have larger international operations than other carriers. For instance, Jet Airways earns 59 per cent of its revenue from overseas flights. But, in case of no-frills airlines such as IndiGo, GoAir and SpiceJet, the operating income in dollars is limited. Vistara and AirAsia do not have international flights yet, while IndiGo and SpiceJet have limited international operations.
However, airlines do earn non-operating income like incentives and credits from aircraft and engine manufacturers in dollars. “It’s a big challenge as most Indian airlines even that with large international operations earn bulk of their revenue in Indian currency,” said an Air India executive
Indian airlines are also not a big believer in hedging foreign exchange. “Hardly any Indian carrier hedge forex as it is a huge risk. It can have an adverse impact too in case rupee starts gaining strength,” a second executive said.