Rupee fall: Some gain, but many in pain

Nearly 85 per cent of India’s national income comes from the domestic economy where the currency of trade is rupee. Yet the steep rise in the value of the dollar against the rupee, which has fallen 22 per cent against the former since the beginning of 2012, is causing a serious concern for many big industries in the country.

Though the fall in rupee should yield benefit to major export-oriented industries like garments, Information Technology (IT), BPO, diamonds, gold jewellery, etc, the gain is limited as the foreign customers are driving the prices down almost to the extent of rupee depreciation.

On the other hand, there are a whole lot of import-dependent industries like petroleum, automobiles, gold jewellery, outbound travel, iron and steel, heavy machinery, etc, which are adversely affected due to rise in dollar’s value. Moreover, the rupee fall has hit industries at a time when the Indian economy is slowing down and the overall demand scenario is not very great. This will certainly impact the job market as large industries are employment intensive. 

IT & BPO: Most experts and analysts are of the view that the Indian IT industry, which earned $69 billion in exports in 2011-12 will have windfall gain from the falling rupee. But the reality is slightly different. While the big companies entering into mid to long-term contracts with their clients can protect their rates in terms of dollar, medium and small companies are being pursued to take a hair cut in rates. Analysts believe that large companies will show a significantly higher profit in the June 2012 quarter due to rupee fall.

Says iGATE CFO Sujit Sircar, “It (rupee fall) is a positive thing for Indian IT in the short-term but not so in the medium-term. Travel expenses will shoot up with the rise in the value of dollar.” Industry analysts also believe that however profitable it might be for this sector, companies will not be able to sustain gains for long. “Though rupee fall adds to profit, IT companies might bring a change in their hedging policy going for short-term hedging and, thereby, losing some gains,” says Angel Broking analyst Ankita Somani.

Increased cost can also eat into some gains as IT major Infosys Ltd realised last year. In an analyst call last month, Infosys Chief Financial Officer V Balakrishnan said, “The rupee had benefited us for the year as it depreciated by close to 5.6 per cent in 2011-12 and that was beneficial to a margin of around 2.3 per cent. But during the year, (employee) utilisation came down by 4 per cent and the rupee benefit was more or less offset by lower utilisation.”

Speaking about the company’s policy on forex management, Balakrishnan said, “Infosys’ hedging position at the end of March 2012 was $889 million. We continue with the policy of hedging for the short-term because we believe volatility will continue for sometime to come.”

Currency fluctuations

To take the currency fluctuations and uncertainties on the stride, some companies have decided that the billing rates can be made neutral. The BPO services provider, EXL Services, for example, is in agreement with clients that any gain on rupee depreciation will be passed on to the client while a rise in the value of rupee will benefit EXL.

EXL Services CEO Rohit Kapoor was quoted in a news daily saying, “It works well for both, for us and our customers. Fall of rupee can be good for us because, if customers get lower price, they can give us more jobs.”

Infosys BPO which registered a 71 per cent net profit growth in the quarter ended March 2012 also seems to have benefited in a big way from the fall of rupee.

Infosys BPO CEO Swami Swaminathan says that though rupee will help them gain a better profit margin, it would not be that significant as 30 per cent of the revenue comes from the centres outside India. On the possibility of clients lowering rates, he says that deals which are already signed will not see any changes, however, it cannot be ruled out for contracts that would be renewed. 

In a statement, India’s premier IT industry body Nasscom said that more than depreciation, the volatility of currency movement is a big concern that needs to be tackled since it hinders the planning process for the Indian IT-BPO industry.

Garment exports: Another big foreign exchange earner for India is the readymade garments industry which earned $34 billion in exports in 2011-12. Logically, these exporters should be making a killing since rupee has fallen by 22 per cent since the beginning of the year. But the reality is different.

Foreign importers, many of whom operate through middlemen, demand lower rates each time an exporter benefits from currency depreciation. Demand for rate cuts come at the time of shipment, though rates were fixed 3 to 4 months in advance with the contractors.

Says Texport Syndicate India Ltd CEO & Director Avinash Misar, “The international market today is expecting us to pass on the advantage of rupee devaluation as demand in Europe & USA is in no great shape. Almost all orders are now being booked with a conversion of Rs 57 per US dollar. Hence, literally, the competitive market has squeezed all the apparent gains.”

Agrees Confederation of Indian Textile Industries (CITI) Secretary General D K Nair, saying, “Rupee depreciation, in itself, is a very positive development for our exports of textiles and clothing. Since import intensity is one of the lowest in this industry, depreciation can only help.”

Car Industry: The list of industries suffering badly due to the falling rupee is long. Take the case of car industry wherein, on an average, 30 per cent of the cost is on account of imported materials like steel plates, engines, gearboxes and other parts. Car-makers fear they will have to raise prices to protect profits. For example, imports account for 25 per cent of the net cost for the car market leader Maruti Suzuki India.

Maruti’s Chief Financial Officer, Ajay Seth, says, “We are badly affected, suffering from an almost 15 per cent drop in rupee in 3 months. Though we have protected ourselves by hedging, it is only a short-term measure. In the long-term, the rupee must appreciate or else we will be in deep trouble.”

His concern is genuine. Value of Maruti’s total import bill in 2011-12 was Rs 8,500 crore in 2011-12 and a 20 per cent depreciation in rupee can shave off Rs 1,700 crore from annual profit. Another car major Toyota Kirloskar Motors (TKM) is worse off as its import dependence is 35 to 40 per cent.

Says TKM Deputy Managing Director (Commercial) Shekar Viswanathan, “We can do little to arrest the hit on our finances due to the sharp depreciation of the rupee. For every rupee depreciation, we lose as much as Rs 90 crore.” TKM is now trying to enhance localisation to reduce its import dependence.

Hyundai Motors India is slightly better off as the company is foreign exchange positive: it has earned more from car exports in 2011-12 than total imports, points out Senior VP (Finance) R Sethuraman.

Gold jewellery: Gold jewellery is another sector which has also lost a bit of its shine. The Rs 1,25,000 crore industry which depends on imports for 80 per cent of the yellow metal requirement, was first hit by the doubling of import duty in the budget. The fall in rupee has now made jewellery more expensive, beyond the reach of large number of customers.

Wait and watch policy

Lamenting about the plight of the industry, jewellery retailer and exporter Rajesh Exports Ltd Chairman Rajesh Mehta says, “As an exporter I am happy, but my buyers abroad are worried by our currency and are reluctant to pay more,” adding that owing to serious volatility importers are not is coming forward adopting a wait and watch policy.

Steel Industry: Indian steel industry depends heavily on imported coal, since large steel manufacturers use imported coking coal in the furnaces of integrated steel plants. The coking coal prices have already reached its peak of $320 per tonne and the fall in rupee is the added burden for steel companies.

Says JSW CEO Vinod Nowal, “The hurt is mainly felt due to the fact that the steel industry is largely dependent on imported raw materials, especially coal which is predominantly sourced from Australia. In the last one month or so, the cost of imported coal has gone up by Rs 1,000 per tonne or so, which needs to borne by the industry.” JSW in the financial year 2011-12 has booked a loss of Rs 800 crore only on account of rupee depreciation. Higher price of imported coal is also a headache for the country’s thermal power plants which are unable to pass on the higher cost of electricity to consumers.

Travel and Tourism: The travel and tourism industry in the country, which has been seeing considerable growth in the last few years thanks to higher disposable income with people, is now buying time expecting the rupee fall to stop. While domestic tourism has got a fillip, foreign tours are still doing well among the high-income segments, obseves Travel Tours India COO Ashwin Narayanan. “For an average Indian family of four with an annual income of Rs 15 lakh or more, one big vacation abroad each year is quite common,” he says. Tourists from abroad are also finding India cheaper as close to 5.80 million people from overseas visited India last year, informed Cox & Kings Ltd Head (Relationships) Karan Anand.

Falling rupee is also a problem for consumer electronics and civil aviation industries. Every time the rupee drops, the loss making domestic airlines are forced to pay more for the ATF (aviation turbine fuel), accounting for 45 per cent of the cost. Jet Airways, for example, has reported a net loss of Rs 298 crore for the March quarter mainly on account of rupee depreciation and higher fuel prices. Another industry that is likely to take a beating is that of heavy power equipment which has a major import basket as Indian companies like BHEL cannot meet the demand in the country.