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Tuesday, 27 December 2011 00:00
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Mark-to-market losses on FCCBs will hti Q3 profits


If the rupee has depreciated by about 16% against the dollar since the start of the year, a large part of this is due to the shortfall in the capital account and the increased pressure on India Inc to redeem loans—the impact of FIIs pulling out a few billion dollars has caught the public attention, but is hardly that significant. Apart from the increased need due to a higher current account deficit, the capital account is also falling short of what expectations were—based on FDI received so far, India is $15 billion short of the year’s target of $35 billion. The other problem, and that affects corporate profitability as well, is that caused by the rupee’s fall as well as that in share prices of firms that have borrowed abroad. Since around half the borrowings appear to be unhedged according to industry, this explains the panic in the currency markets.

Close to $11 billion of ECBs are due to mature in 2012-13; add to that $6 billion worth of FCCBs, since it seems very unlikely now that any of these will be converted into equity. So, a mark-to-market loss is inevitable; moreover, if the loan is repaid and a fresh loan negotiated, the company would have to take a hit on the profit and loss account. RCom, FE reported Monday, has $925 million of outstanding FCCBs and has incurred a loss of R756 crore on this so far—the FCCB is due in February next year. Tata Motors has $473 million of FCCBs due in June and mark-to-market losses of R556 crore on this so far. The Institute of Chartered Accountants of India has proposed that companies be allowed to show their mark-to-market losses in the balance sheets instead of in their profit & loss accounts—this will hit Q3 results in a big way—but the corporate affairs ministry is yet to take a view on this.

As for refinancing loans, it’s true that India Inc’s credit quality hasn’t deteriorated too much in the sense that there haven’t been too many downgrades; business may not be as brisk as it was a year ago, but no one’s defaulting just yet. There are sectors like power, telecom or real estate, which are more vulnerable than the rest and to which RBI has drawn attention. Firms that have been servicing their forex loans through cash flows need not really worry while those that have a natural hedge should be relatively better off. But for those firms that are going to make bullet repayments, the cost of borrowing, through a syndicated loan, has gone up by a minimum of 150-200 basis points at a time when there isn’t sufficient dollar liquidity and risk aversion is high. One more reason for an earnings downgrade.



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