At a recent meeting in Kolkata, Tata Steel vice-president (finance) Koushik Chatterjee was asked about his reaction to the incessant rise in the value of the rupee against the dollar.
At a time when software companies were reporting disappointing results on account of this, an unperturbed Chatterjee said Tata Steel would reap significant benefits from the new exchange rate, which would be disclosed with its results for the last quarter.
Tata Steel is not alone. The rupee story, which has dented the results of export-oriented companies, has another side to it. As the Indian currency's value against the dollar moved from 44 on March 30 this year to 41 on June 30, there is a bunch whose numbers have received a boost.
"Who benefits and who loses will depend on whether they are on the import side or export," said Ajit Ranade, chief economist with Aditya Birla Group.Companies with sizeable dollar loans have also benefited as the difference between the estimated interest outgo and the actual interest paid is shown as net gains from exchange fluctuation.
Other income, swelled by foreign exchange gains, contributed 21.47 per cent of the profit before tax of 331 companies (financial services companies are not studied here) in the quarter ended June 2007 -- the highest in five quarters.
The figure was only 13.11 per cent in the quarter ended June last year. Little surprise, then, that the PBT of these companies grew 32.9 per cent in the last quarter. Exclude other income and the growth falls to 20 per cent.
In the four previous quarters, the PBT growth rose even if one excluded other income.
"If you have borrowings in your books in currencies that are depreciating against the rupee, you have a transaction gain from time to time. If there is a repayment of loan in the quarter, there is a realised gain," said Y M Deosthalee, director and chief financial officer of the construction to engineering company Larsen & Toubro, which has $600 million worth of overseas loans in dollars and yen and reported nearly Rs 134 crore (Rs 1.34 billion) in foreign exchange gains last quarter.
Some of this gain was realised in the last quarter, but a significant part remains notional. "For short-term liabilities, there is a likelihood that it will be realised," said Deosthalee. The gains on hedging of foreign currency by exporters, and savings on account of import of capital also show up as currency gains.
Pharmaceutical company Ranbaxy Laboratories, which has dollar loans of $750 million and reported a foreign exchange gain of almost Rs 200 crore (Rs 2 billion) last quarter, has a natural hedge against a rising rupee.
Even though it lost Rs 40 crore (Rs 400 million) in the revaluation of receivables, the net gain was still Rs 160 crore (Rs 1.6 billion). Ranbaxy's case is especially interesting because it earns a large part of its revenues from its US operations.
However, what it may lose on the sales front on account of the rising rupee, it makes up for with gains on forward exchange contracts. What is more, the Rs 70 crore (Rs 700 million) it gained on this front is actual gain.
The bigger component of Rs 160 crore on dollar loans, on the other hand, is largely notional. "Tomorrow, if the rupee were to appreciate, the notional gain will become a notional loss," said an analyst.
Ranade offered another calming argument. "If you have a foreign currency loan, you make some profit on the financing side. But most of these companies are not in the business of financing, but producing goods," he said.