The accounting rules, called AS-11 provisions, make it mandatory for companies to provide mark-to-market provisions in their profit and loss accounts for any change in foreign currency liabilities. The worst hit are companies that mainly serve the domestic market and have opted for foreign currency loans to finance their growth plans.
According to an analysis by ETIG, corporate profits will suffer from mark-to-market (MTM) losses. Tata Steel may report a forex loss of around Rs 344 crore, while Tata Motors may take a loss of Rs 311 crore. Tata Chemicals, which borrowed $475 million in foreign currency to finance its overseas acquisitions, is expected to report a forex loss of Rs 187 million. Ranbaxy, JSW Steel and Firstsource Solutions will lose Rs 100 crore and Rs 400 crore each. The list of companies is not complete as it is estimated that dozens of companies raised Forex debt last year.
Thankfully, these are only accounting entries and do not affect cash flow. However, this is likely to be read negatively by the stock market. Market participants actively track the net profits of companies and any negative development affects valuations. The rupee had a positive impact on the above companies until last year, but it depreciated by more than 9% in the quarter ended September 2008.
When the rupee depreciates, the value of the foreign currency liability expressed in rupee terms increases and vice versa. As per the terms of AS-11, the increase in liability should be reflected in the statement of profit and loss in the quarter and translate into lower corporate profit. Most companies are focused on the domestic market and are therefore unlikely to benefit from a weaker rupee.
A depreciation of the rupee will hit small companies hard, while large companies will be least affected. First Source Solutions may report a net loss, while Tata Steel may see a decline of 100 basis points in its net profit margin due to forex losses. To put things into perspective, most companies will experience a 10-50% increase in their operating profits.
Companies such as Reliance Communication, Reliance Industries and Bharti Airtel follow Schedule-VI of the Companies Act instead of AS-11 and hence are unlikely to impact their quarterly profit and loss statements. The operating profit of the two Reliance companies would have been lower by around Rs 800-900 crore if they had subscribed to the AS11 norms.
As a credible and reliable news source
