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Weak rupee takes its toll on large overseas debt

The worldwide financial disaster is starting to weigh closely on India Inc.’s stability sheet, due to the depreciating rupee. Whereas a weakening rupee may brighten export-oriented sectors equivalent to IT and textiles, it has pushed up the overseas alternate liabilities of Indian firms.

Accounting guidelines, referred to as AS-11 provisions, require firms to make mark-to-market provisions of their earnings statements for any modifications in overseas foreign money loans. Hardest hit are the businesses that primarily serve the home market and have opted for overseas foreign money loans to finance their development plans.

Based on an evaluation by ETIG, the profitability of firms can be affected by mark-to-market (MTM) losses. Tata Metal could report a foreign exchange lack of round Rs 344 crore whereas Tata Motors may take successful of Rs 311 crore. Tata Chemical compounds, which took a $475 million overseas foreign money mortgage to fund its abroad acquisitions, is estimated to report a foreign exchange lack of Rs 187 crore. Ranbaxy, JSW Metal and Firstsource Options lose Rs 100 crore and Rs 400 crore every. The listing of firms just isn’t exhaustive, as an estimated a dozen firms raised foreign exchange debt final yr.

Happily, that is simply an accounting entry and won’t have an effect on money flows. Nevertheless, it’s more likely to be seen negatively by the inventory market. Market contributors actively monitor the online income of firms and any hostile developments have an effect on valuations. The rupee positively impacted a lot of the firms talked about above till final yr, however declined in worth by greater than 9% within the quarter ended September 2008.

When the rupee decreases in worth, the worth of the overseas foreign money legal responsibility, expressed in rupee phrases, will increase and vice versa. Below AS-11 provisions, a rise in legal responsibility ought to be mirrored within the quarterly earnings assertion and translate into decrease company income. Most firms are centered on the home market and are subsequently unlikely to learn from a weakening rupee.

The falling rupee will hit small companies exhausting, whereas the massive ones can be hit solely reasonably. Firstsource Options could report a internet loss, whereas Tata Metal may see a 100 foundation level drop in internet revenue margin as a result of foreign exchange losses. To place issues in perspective, most firms will expertise a lack of 10-50% of their working revenue.

Firms equivalent to Reliance Communication, Reliance Industries and Bharti Airtel observe Schedule VI of the Firms Act, somewhat than AS-11, and are subsequently unlikely to see an influence on their quarterly revenue and loss statements. The working income of the 2 Reliance firms would have been about Rs 800-900 crore decrease if that they had subscribed to the AS11 requirements.

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