Over the last six months the rupee is down by 18%. Indian corporates who had raised loans from the overseas markets and did not bother to cover their currency exposure were a worried lot. The losses on the currency exposure were going to hurt their profits. But a recent guideline from the ministry of corporate affairs will allow them to now amortise these losses for the next ten years and this will put a lot of Indian companies back into the black.
According to a Crisil report, the depreciation of the rupee will wipe off 8% or Rs 48 billion of the profits for Nifty companies for July-September quarter. The foreign debt of these companies works out to around 24% of the total outstanding debt which is considered reasonably high as any further depreciation of the currency will harm profits. Now with companies allowed to amortise their losses over a longer period, these companies can take relief as the bottom lines or profits will not be hurt severely.
The rupee had witnessed a similar fall in 2009 when it had touched Rs 48 against the dollar and Clause 46 (of accounting Standard 11) allowed companies to amortise losses to the extent of two years. So a loss of $10 million was written off over two years. Now with the new change, Indian companies will be allowed to capitalize the losses in the assets purchased out of long term foreign currency loans and depreciate these losses over the life of the assets. In case of other long term the loans, the foreign exchange losses will be amortised over the tenure of the loan.
Not many companies had exercised this option of writing off their losses in 2009. According to a Crisil study, 42 non-finance companies Nifty companies, only nine companies exercised the option.
According to IFRS, companies do not amortise their losses and they have to take a hit on their P&L account on the same year. However, this will not have any implications on the cash flows, as these are marked to market losses.
What matters is how well companies disclose details pertaining to these losses in their financial statements. Informed and institutional investors will need to know how companies are showing these losses parked in the balance sheet in their financial statements to make their own calculations and adjustments”, says Prasad Koparkar, Head – Industry and Customised research, Crisil.
The fall in rupee is expected to hurt sectors such as oil & gas downstream, telecom and steel as they have high debt:equty ratios where the debt is in foreign currencies. On the other hand sectors like IT and Pharma are benefiting from this fall as their export revenue is more than 50% of their total turnover.