The depreciation in the rupee against the dollar is one of the major concerns for any sector with huge liabilities in foreign currency. One sector that has been impacted by the sharp depreciation of the rupee is the steel industry, which has higher liabilities in foreign currency, as it largely depends on imported raw material, i.e., coking coal, for crude steel production.
A sharp fall of the rupee from the near Rs 44-level against the US dollar to the current level below Rs 52 has made the cost of repaying these foreign loans costlier. The depreciation of the rupee largely impacts the companies on their foreign borrowings in terms of ECB, LC and FCCB, which remains a notional loss. The other effect has been on the increase in the cost of imported products.
In a normal business environment, companies tend to hedge their position against any uncertainties. However, companies that were not able to hedge their position due to sharp fall in the rupee remain exposed to the volatility in the currency market. Steel companies like JSW Steel, Jindal Steel and Power, SAIL, Sterlite Industries etc. have been badly impacted by the fall in the rupee, and have to show forex losses in their books. JSW Steel had a total forex loss of Rs 512 cr for the ended September, and it has a total outstanding FCCB loan of US$325 million. SAIL, India largest steel producer, also reported a 55% drop in quarterly net profits because of unexpected massive forex losses of around Rs 509 cr. Other metal stocks like Sterlite Industries also had forex losses of Rs 466 cr due to restatement of its foreign currency convertible bonds (FCCBs) and forward cover of US$ 500 million related to cash flows from its international zinc assets.
| Outstanding Foreign Currency Loan (Rs Cr) |
| Company | Outstanding loan | Forex exchange
loss in Q2FY12 |
| TATA steel | 2439 | 0 |
| SAIL | 0 | -508 |
| Bhusan Steel | 3345.09 | 0 |
| ISMT Ltd | 435.84 | -12.45 |
| Jai Balagi Ind Ltd | 116.97 | 0 |
| JSL Stainless Ltd | 1236.8 | -159 |
| JSW steel | 1825.78 | -512 |
| Usha Martin | 581.6 | -120 |
| Uttam Galva | 167.4 | 0 |
| Sesa Goa | 968 | -234 |
Other companies whose profits were impacted include Sesa Goa, which reported a steep 99% fall in its net profits for the quarter. JSL Stainless and Usha Martin also posted losses.
Forex losses have eaten away at the profits of the major companies and have also impacted the overall performance of the sector during the September quarter. The total profit of 62 companies that we have analysed were down by 70%, largely on account of higher forex losses.
We, at DSIJ, believe that if the rupee continues to remain firm or rallies further from here, then companies that have huge foreign loans will witness further forexes loss and lower profits in the coming quarter.