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The other side of rupee rise: forex gains in June quarter

Kumar Shankar Roy

A 7 per cent appreciation in the rupee has spelt trouble for Indian tech giants, but leading companies that have raised debt overseas have actually received a profit boost from the rise in the domestic currency. Companies such as Larsen & Toubro, Tata Tea and Great Offshore have reported a surge in net profit in the June quarter on higher “other income” coming from exchange-related gains on their foreign loan outstandings.

The rupee has appreciated by 7 per cent in the March-June quarter. This has come as welcome development for firms that have significant dollar-denominated loans as a rising rupee reduced the cost of servicing the loan, both in terms of interest payouts and the actual loan amount outstanding.

A case in point is that of engineering and construction major Larsen & Toubro, whose net profits have more than doubled this June quarter helped by “other income” of Rs 211.5 crore. Close to two-thirds of this owes to exchange differences on foreign currency borrowings and deposits. While a stronger rupee hurt exporters’ earnings, pharma major Ranbaxy hasn’t been one to complain. A significant portion of the company’s Rs 266 crore consolidated net profits for the June quarter came from exchange gains on its foreign currency borrowings (mainly convertible bonds).

Shipping major Great Offshore, Ashok Leyland and Jubilant Organosys are other companies that have reported gains on foreign loan exposures this quarter.

Apart from companies that have declared their quarterly numbers, there could be several others with significant foreign loan exposures benefiting from the appreciating rupee this quarter. According to Prime Database, India Inc raised a whopping Rs 43,600 crore through overseas borrowings in 2006. Mahindra & Mahindra, Reliance Communications, Jaiprakash Associates and Bharti Airtel are among the large companies that raised foreign currency loans in 2006.

New accounting norms from last year require companies to recognise forex gains/losses on borrowings every quarter, even if they are unrealised. It should be noted that such exchange gains/losses on foreign loans are mainly in the nature of a notional gain for a company each quarter.

The actual savings on the loan obligation will be based on the exchange rate at the time of repayment. Further, for companies such as Ranbaxy whose foreign currency loans are convertible into equity shares, the gains would materialise only if the loans are not converted into shares at a later date.

More Stories on : Forex | Overseas Borrowings

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