Rupee falls to dig into India Inc margins

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As the rupee approaches 80 per dollar, companies in import-sensitive sectors remain on edge on fears that further escalation in input prices will erode their margins, while a fall in demand will affect their ability to raise finished goods prices.

Executives FE has spoken to on sectors ranging from oil, energy and steel to chemicals are expected to feel the pinch as imports of commodities such as crude oil, coal and chemicals become more expensive. Some of them also feared “imported inflation” as India is a net importer of commodities. Smaller companies with limited hedging capabilities are hit harder than larger ones during periods of currency volatility.

Of course, the recent easing in global oil and other commodity prices will soften the blow of a weak rupee somewhat, they conceded. However, the magnitude of the impact of the fall in the rupee on businesses varies by sector depending on their reliance on imports. Interestingly, the country’s largest automaker, Maruti Suzuki, sees gains on the rupee’s movement as the domestic currency has actually appreciated against the Japanese yen.

But importing thermal coal from Indonesia, which accounts for about half of India’s total overseas purchases of the commodity, will cost more. This will feed into electricity tariffs, an official with the state NTPC said. Although currency devaluation is unlikely to increase costs for NTPC, which placed orders worth Rs 8,308 crore for 6.25 million tonnes of (imported) coal by Adani Enterprises last month, it could hurt Adani’s margins.

While Coal India, which has placed orders with Baradaya Energi to procure about 6 million tonnes of coal, remains isolated as tenders are quoted in rupees, the supplier is set to take a hit.

Lalit Beriwala, chief executive of Shyam Steel, said the flagging rupee will push up the landed price of South Africa’s coking coal, which has already doubled from a year earlier to about Rs 24,000 a ton. Steel companies may need to spend 15-18% more on key inputs, with hedging costs also increasing, he said.

Oil import costs for downstream companies such as Indian Oil Corporation, BPCL and Reliance Industries will increase. However, upstream oil companies like ONGC could benefit from the decline in the rupee. Since crude oil is traded in dollars, every rupee devaluation against the greenback can potentially add about Rs. 1,200 billion to ONGC’s revenues and about Rs. 650 billion to its profits a year, a company spokesman said.

In addition, the devaluation of the rupee is likely to have an impact on the Department of Energy’s recent policy of blending 10% imported coal to address domestic shortages of the commodity.

Natubhai Patel, chief executive of Gujarat-based chemicals company Meghmani Organics, said increased import costs are also driving up prices of finished products, although the cost hike cannot be fully passed on to consumers. Some segments of the pharmaceutical industry obtain up to 60% of their input requirements from abroad. Similarly, import dependency for inputs in select agrochemical segments is 40%, Patel said.

According to a Crisil analysis of financials for over 300 companies (excluding financials and the oil & gas sector), corporate profitability in the June quarter is likely already down 200 to 300 basis points from a year earlier.

Alok Sahay, general secretary of the Indian Steel Association, said the fall in the rupee would push up input costs. However, “there would be no immediate impact on domestic steel prices as this occurs with a lag of about two months.”

Firms in some other sectors, where reliance on imports for inputs is very limited, are not troubled by the rupee’s decline.
Shreevar Kheruka, Borosil’s Managing Director and Chief Executive, said: “I don’t see a huge impact on the manufacturing sector. If anything a weaker rupee will help exports and combined with the China +1 factor I believe this is a great opportunity for the entire manufacturing sector. For Borosil, a weaker rupee can only improve margins as we manufacture a large part of our goods in India and compete with imports from the rest of the world,” added Kheruka.

B. Thiagarajan, Managing Director of Blue Star, said: “Some of the commodity prices are falling drastically and that will partially offset the impact of the rupee devaluation. I’m more concerned about inflation than the fall in the rupee. We keep 45-day inventory of finished goods in the system, raw materials are kept for 3 months and we also hedge against currency risk. So, as a manufacturer, these daily currency changes are not that important to me,” he added.

Shashank Srivastava, Senior Executive Director (Marketing and Sales) at Maruti Suzuki India said: “It also depends on what you are importing and what currency you are importing in. For Maruti, many imports are in yen. Therefore, the yen-rupee rate is more important to us than the dollar-rupee rate.”

As the yen has depreciated against the rupee, it has “proven to our advantage,” he added.

Vimal Kejriwal, Managing Director and Chief Executive at KEC International, an engineering, procurement and construction company, said: “Most project exporters like us would definitely benefit from the decline in the rupee. In our case, about 50% of our total revenue comes from overseas operations, and in some ways we are no different from an IT company.”

(With contributions from Surya Sarathi Ray and Varun Singh in New Delhi, Nayan Dave in Ahmedabad and Rajesh Kurup in Mumbai)

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