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Business News/ Companies / Company-results/  Firms show higher profits on forex gains
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Firms show higher profits on forex gains

About 74 firms made cumulative net forex gains of `981.6 cr in the Sep quarter against a net loss of `1,629 cr a year-ago

The rupee touched an all-time low of `57.15 to the dollar on 22 June. It, however, rose 5.25% in the September quarter. Photo: Mint (Mint)Premium
The rupee touched an all-time low of `57.15 to the dollar on 22 June. It, however, rose 5.25% in the September quarter. Photo: Mint
(Mint)

Mumbai: The economy remains sluggish but many Indian companies reported profits in the September quarter on substantial but notional foreign exchange gains, although growth in their core businesses slowed.

About 74 companies in their September quarter results made cumulative net forex gains of 981.6 crore, against a net loss of 1,629 crore in the year-ago quarter, according to Capitaline, a provider of financial and corporate information.

Foreign exchange dealers say the appreciation in the domestic currency, along with an appropriate hedging strategy, had helped these firms recover losses and reduce repayment liabilities to overseas investors.

The rupee touched an all-time low of 57.15 to the dollar on 22 June. It, however, rose 5.25% in the September quarter, mostly in the last two weeks of September (2.74%), when the government announced reforms measures for fiscal consolidation and a revival of investor confidence.

The government in September allowed foreign direct investment in multi-brand retail and domestic carriers, raised the price of diesel and capped the sale of subsidized cooking gas. This has increased the flow of funds from foreign institutional investors (FII) into Indian equities and propped up the local currency.

The profits of these companies may have risen sharply, but growth in the core income of many companies has been muted.

“One cannot take the profits prima facie. The gains are unrealized. The weakness in business is camouflaged by forex gains," said Anil Bhalotia, head of foreign exchange and options at ICAP India Pvt. Ltd.

JSW Steel Ltd is a case in point. It had incurred a 669 crore loss during the September quarter in fiscal 2012. In the same quarter of fiscal 2013, it was not only able to erase the loss through forex gains, but also post a net profit of 691 crore.

While JSW Steel skewed the overall forex gains towards positive, Cairn India Ltd, as an exception, posted a massive foreign exchange loss of 786 crore. However, overall gains exceeded losses.

JSW Steel, in a statement on 28 October, acknowledged net profit had risen “mainly on higher volumes and rupee appreciation impact" despite raw material constraints.

But its gains come at a time when the steel sector outlook is bleak in the near term and prices have taken a hit, affecting its core business. The steel industry saw subdued demand growth of 2.8% during the September quarter compared with 7.7% in the preceding quarter.

Other beneficiaries of forex gains include Petronet LNG Ltd, Power Grid Corp. of India Ltd, Adani Enterprises Ltd and Sterlite Industries India Ltd.

“The windfall gains are notional and reflect on the results of companies due to a sharp appreciation in the rupee during the second quarter. Companies that are net exporters have taken covers at higher rates on the basis of their risk management policies," said Abhishek Goenka, chief executive at India Forex Advisors Pvt. Ltd.

These forward covers are in the money (notional) and hence showing treasury (mark-to-market) gains, he added.

Goenka explained that in the last fiscal year, excessive rupee volatility (the currency fell 12.37% against the dollar in that period) came as a surprise for many companies and wrong hedging bets led to losses. “Moreover, the cover was taken for a longer period which hammered the profits over consecutive quarters," Goenka said.

Several information technology (IT) services providers including Tata Consultancy Services Ltd (TCS) had their profitability dented in the last fiscal due to long-term forex cover taken at unfavourable rupee levels. However, in the second quarter of this fiscal, TCS’s net forex gain stood at 92 crore against a 80 crore loss in the year-ago period.

Chief financial officer S. Mahalingam admitted these were exceptional gains and, in the next quarter, he does not expect similar gains. “I am not able to see anything that will appreciate the rupee," he said.

Infosys Ltd also posted a forex gain of 157 crore compared with a loss of 33 crore in the year-ago period.

Treasury heads attribute most of the forex gains to unhedged foreign exchange exposure.

“If a large part of the forex exposure remains unhedged, the forex gains or losses will be massive," said Partha Bhattacharyya, treasury head for Essar Group. While these gains or losses do not mean much for businesses that have dollar-linked revenues, they are crucial for sectors such as power that do not have a natural hedge, he added.

The fall of the rupee is bad for importers. Not only does it increase their expenditure but in the case of power companies, when coupled with an inflexible tariff structure, it translates into huge losses. A rising currency does the opposite.

Meanwhile, although a large portion of forex exposure remains unhedged, Indian companies have grown more cautious and are choosing a mixed strategy for hedging.

“Right now, Indian companies on an average choose to hedge about 50% of the forex exposure, especially what is due for repayment in the near term. While most of the times the principal amount is left unhedged, they ensure that the interest liability is hedged adequately," said Bhalotia of ICAP.

Forex traders suggest that for companies that do not have a natural hedge up to 70% of the forex exposure should be hedged to minimize losses.

In its October monetary policy, the Reserve Bank of India asked banks to evaluate the risks arising out of unhedged foreign currency exposure of companies, price them in the credit risk premium, and consider stipulating a limit on the unhedged position on the basis of banks’ board-approved policy.

Most forex traders say forex gains or losses in the coming quarter will be marginal as they expect the rupee to correct slightly. Most analysts forecast an exchange rate of 52.8-55 per dollar by December.

“The forex market is perception-sensitive. It had overreacted when the government announced reforms in September and now it should correct a bit," Bhattacharyya of Essar said. However, if finance minister P. Chidambaram can convert his intent to achieve fiscal consolidation into action, the rupee can appreciate and go towards 51 against the dollar, he said.

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Published: 05 Nov 2012, 12:04 AM IST
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