As China melts, Tata Motors, few others brace for storm

However, the IT firms will get some benefits, as software exports from their Chinese campuses will yield more in local currency

The six per cent fall in the yuan since August could upset plans of Indian companies like Tata Motors and Hindalco's Novelis, which have sprawling businesses in China.

The negative impact of the China slowdown can be seen in the stock prices of Tata Motors and Hindalco, which are this week down 12 per cent and 9.3 per cent, respectively.

For Indian information technology services companies like Infosys, which have campuses in China, the impact will not be material. "For most of them, China headcount is quite small. Besides, some of the business in China also comes from local clients, which means both the revenue as well as cost would be in Chinese currency," said Girish Paranjpe, former joint chief executive of Wipro's IT business.

The IT firms will get some benefits, as software exports from their Chinese campuses will yield more in local currency, but will lose if the yuan depreciates more than the rupee.

V Balakrishnan, former chief financial officer of Infosys and chairman of Exfinity Venture Partners, said: "Indian IT firms may also lose as and when that (Chinese) currency will depreciate faster than the rupee, as the realisation will also come down. Besides, outsourcing spend from local corporates will also come down, under this pressure."

Analysts said the Tata Motors stock corrected because its subsidiary Jaguar Land Rover (JLR) missed its sales target for 2015, with sales in China falling 24 per cent for the year.

Chinese arms of Indian firms brace for storm Analysts have estimated that for every five per cent fall in the yuan against the British pound, JLR's earnings before interest, tax and depreciation will be affected by about three per cent.

"We think the worst is over for JLR in China. With strong launches and the management correcting its pricing mistakes, growth will resume in China despite the devaluation hurting it in terms of profitability," said Nitesh Sharma, an analyst with PhillipCapital (India).

Hindalco subsidiary Novelis had set up a manufacturing plant in China in 2012 to cash in on the rising automobile and beer can markets. But demand is expected to slow down this year. "Any slowdown in Chinese demand is bad news for Hindalco, which is yet to receive any returns on its $6-billion investment in Novelis," said an analyst.

An executive with the Anil Ambani group said Reliance Communications and Reliance Power, which took loans from Chinese banks to fund their expansion, would not be affected by the yuan's depreciation because the loans are dollar-denominated.

In January 2012, Chinese banks lent $1.18 billion to Reliance Communications to repay its bonds due for redemption in March 2012. In the same year, Chinese banks lent $1.1 billion to Reliance Power for the Sasan power project.

Photograph: Romeo Ranoco/Reuters