Rupee @ 80: Forex deficit to hurt India Inc's margins

The rupee breached the 80-mark against the dollar on Tuesday.

The steady depreciation in the value of the rupee against the US dollar is likely to prove expensive for corporate India.

The listed companies’ revenue expenses in foreign currency or imports exceed their export revenues or revenue earnings in forex.

In their latest financial year, BSE500 companies, excluding banks and non-banking finance companies and insurance (BFSI), reported combined forex expenses of Rs 12.31 trillion against forex earnings of around Rs 10 trillion.

Given this, rupee depreciation will result in a faster rise in expenses hurting corporate margins and profitability in the forthcoming quarters.

Forex revenues or exports accounted for 21.6 per cent of the companies' combined net sales.

In comparison, imports or forex expenses accounted for 31.8 per cent of their total operating expenses, including raw materials and energy.

The Indian currency has depreciated by nearly 7 per cent against the USD year to date and is currently trading at around Rs 80/USD.

The forex revenue gap is much bigger for companies excluding IT Services and pharmaceuticals.

Excluding these two export-oriented sectors, the forex revenues for the rest of India Inc. were around Rs 5 trillion in FY22/FY21 against forex expenses of around Rs 10 trillion.

The biggest importers are oil and gas companies, followed by metals and mining companies.

On the other hand, the IT Services and pharmaceutical companies account for nearly half of corporate India's total forex revenues in the latest financial but only 18.3 per cent of the overall forex expenses for our sample.

In all, the companies in these sectors earned Rs 4.98 trillion through exports but spent only Rs 2.25 trillion on imports in their latest fiscal year.

In all, exports accounted for nearly 80 per cent of the companies' combined net sales in these two sectors.

The Business Standard analysis is based on standalone annual finances of a sample of 407 BSE500 companies’ ex-banks, NBFCs and Insurance companies (BFSI).

Of these 186 companies, the latest numbers are for the financial year 2021-22, while the rest of the company’s latest number is for FY 2020-21.

Given this, the forex revenues and expense numbers will likely change once all companies publish their annual report for FY22 that contains the data on forex transactions.

Our data doesn't include the finances of overseas subsidiaries of companies such as Tata Steel, Tata Motors, Bharti Airtel, Hindalco and Motherson Sumi, among others.

"A currency depreciation means that companies will have spent more on their imported inputs and raw materials.

"The recent fall in the rupee will negatively impact corporate margin and earnings in FY23," says Dhananjay Sinha, MD and chief strategist of JM Institutional Equity.

He says that the company's specific impact will also depend on the relative change in the prices of their final product and their raw materials.

Others, however, say that the net impact of the rupee depreciation will be marginally positive for the overall corporate earnings, given the bigger share of export-oriented sectors such as IT and pharma.

"Currency depreciation will largely hit cyclical sectors such as metals and mining, capital goods and infra while it is positive for IT and pharma.

"But given the higher weightage of IT and pharma in the overall sample, depreciation will be positive for overall earnings in FY23," says Shailendra Kumar, CIO of Narnolia Securities.