Impact Of Currency Fluctuation On Various Sectors

Published Date: 02 Nov 2017

I would like to thank all those who have helped me during my research project. It is a matter of great pleasure for me to express my sincere gratitude towards my faculty guide Mrs Kiran Desai and my former faculty guide Mrs Manisha Bapna who has helped a lot in the first part of the research report.

Special thanks to my cousin Mihir Shah for guiding me throughout the research. I would also like to thank college faculty Mr Abhay Kumar who has also given his important inputs.

I am grateful to the Chairperson: Technology Management – Prof. R. C. Agarwal, Dr Satish Modh, Dean Technology Management and Dr. Sunil Rai, Ex-Dean Technology Management for providing the opportunity & facilities for writing this research paper.

ABSTRACT

A lot has happened in the foreign exchange market since the past couple of years with the rupee reaching an all time low of 57.12 in June 2012. Indian Government and RBI are taking this seriously and thinking of various measures to bring the Rupee to sub 55 levels. The depreciating Rupee has played its role on various industrial sectors and they are using all forms of measures to shield themselves from the impact of the fluctuating Rupee. Exchange rates are getting increasingly volatile and unpredictable. High volatility in exchange rates are capable of turning high profit companies into losses. Recently the government has passed the bill for 51% FDI in multi brand retail and 100% FDI in single brand retail which will play its role in cross trading of currencies and have its impact on the fluctuating Rupee.

TABLE OF INDEX

Chapter No.

Topic

Pg. No.

Title of the Research Proposal

1

Acknowledgements

2

Abstract

3

Lists of figures and tables

5

1

INTRODUCTION

6

1.1

Statement of the problem

6

1.2

Purpose

6

1.3

Significance

6

2

LITERATURE REVIEW

7

2.1

Impact of currency fluctuation on Corporate India

7

2.2

Risk hedging measures adopted by corporate India

8

3

METHODOLOGY AND DATA SOURCES

11

3.1

Data collection

12

3.2

Sampling

13

4

RESEARCH FRAMEWORK OF THE STUDY

14

4.1

Assumptions

14

4.2

Hypothesis

14

5

ANALYSIS AND INFERENCE

15

6

SUMMARY AND CONCLUSIONS

28

6.1

Summary

28

6.2

Conclusions

28

6.3

Scope and Recommendations

28

6.4

Limitations of the study

29

7

APPENDIX

30

8

REFERENCES

32

Lists of figures and tables

Fig1: US$/INR since Aug2009-Dec12

Fig2: US$/INR vs TCS Net Revenues (Based to 100)

Fig3: US$/INR vs WIPRO Net Revenues (Based to 100)

Fig4: US$/INR vs Tech Mahindra Net Revenues (Based to 100)

Fig5: US$/INR vs Mahindra Satyam Net Revenues (Based to 100)

Fig6: US$/INR vs Infosys Revenues (Based to 100)

Fig7: US$/INR vs HPCL Total Expenditure (Based to 100)

Fig8: US$/INR vs IOC Total Expenditure (Based to 100)

Fig 9: Survey conducted in the following sectors

Fig10: Results based on the survey

Fig 11: Results based on the survey

Lists of tables

Table1: Correlation between Net Revenues of TCS and USD/INR

Table2: Correlation between Net Revenues of WIPRO and USD/INR

Table3: Correlation between Net Revenues of Tech Mahindra and USD/INR

Table4: Correlation between Net Revenues of Mahindra Satyam and USD/INR

Table5: Correlation between Net Revenues of Infosys and USD/INR

Table6: Correlation between Net Revenues of HPCL and USD/INR

Table7: Correlation between Net Revenues of IOC and USD/INR

Table8: Summary of industries used for research

INTRODUCTION

Statement of the Problem

India has come a long way from the old days of tight foreign exchange policy. Rupee was made partially convertible in 1993 in current account. Foreign exchange market is now governed by demand and supply. Indian firms are getting global day by day. Foreign investment in India is soaring year on year. This has caused tremendous increase in cross currency flows. Corporate India is now shifting its role from a passive one in currency management to an active one.

With immense competition firms cannot neglect currency management. Any mismanagement could lead any company from profits to losses despite good sales and a good profit margin on their products.

The problem statement is ‘The impact of currency fluctuation on various sectors in India and the risk hedging measures taken by each of them.’

Purpose of the Study

The purpose of the study in simpler terms can be defined as:

Impact of currency appreciation and depreciation on certain sectors and concluding whether there exists a general trend or not

Effect of currency movement on revenues of companies with net positive foreign currency inflow and effect of currency fluctuation on import of companies with net foreign currency outflow

Evaluating the impact of currency fluctuation on companies with no direct exposure to foreign currency

Significance of the Study

This paper will help students, future researchers and others to understand and predict the impact of currency fluctuation in different industries and would avail them with techniques to hedge this currency risk

LITERATURE REVIEW

Impact of currency fluctuation on Corporate India

Companies whether big, small or medium all get affected by the currency if they trade internationally. Earlier when companies used to trade only domestically, issue of currency exchange didn’t matter at all. But now with globalisation and every firm wanting to have a global market share, currency exchange fluctuation plays a very important role. Since currency in India is free floating and not fixed like the Chinese currency, all companies are exposed to this risk.

Currency fluctuation doesn’t only affect the companies that trade in foreign currencies. With a competitive and mature market, even companies that don’t trade internationally get affected by currency fluctuation.

Direct impacts of currency appreciation:

Positive impacts:

Servicing foreign debt: Many Indian companies have a lot of borrowings from foreign countries such as US where the interest rates are extremely low as compared to India. Raising foreign currency loans is known as ECBs (External Commercial Borrowings). To service their interests companies prefer an appreciated currency so that they have to shell out fewer INR for paying the interest in USD. This would prevent them taking a bigger hit in their bottom-line.

Outbound tourists/students: With an appreciated home currency, foreign visits become cheaper helping the tourism companies which service for international tours.

Government reserves: The Indian Government is in the mode of divestment and an appreciated currency would mean more dollars would have to be spent by the foreign investors to buy a stake in the public sector companies. This would increase the dollar reserves with the government

Importing companies: The greatest positive factor would be for the companies that import their supplies. Appreciated rupee would mean they have to pay fewer rupees for the imports resulting in increased profits and goods becoming cheaper.

Inflation under control: An appreciated currency would prevent soaring inflation. This would help companies with a domestic market since due to lower prices demand would be high and sales for companies would be high.

Negative impacts:

Exporting companies: Indian companies all over the world are known for their cost competitiveness and not extreme quality. An appreciated rupee makes their products expensive in the international market in front of other competing companies whose national currency has not appreciated. This takes the cost advantage away from the Indian companies.

Earnings impacted: BPO and software companies that receive their earnings in dollars get negatively affected by the appreciated rupee since the dollars now fetch those fewer rupees.

Risk hedging measures adopted by corporate India

Types of Risk

Types of risks can be majorly classified as transaction risk, translation risk and the operating risk.

Measuring risk

Risk can be explained as the variance of an outcome from the expected, which results in a loss. Risk is that uncertainty which results in a negative outcome.

Risk= Probability*Consequence

Currency hedging

Hedging can be appropriately expressed as taking a position in a market which is opposing to offset and balance against the risk. To hedge means to offset against something.

Hedging techniques

Internal

These techniques are used by multinationals that have their subsidiaries in various countries. It is also referred to as passive hedging. Companies are expected to manage their risks from their various subsidiaries using the techniques as below-

Netting

It refers to netting the payment and expenses among the group companies. It involves reducing the number of intercompany payments and receipts that require currency exchanges. Multilateral netting involves netting among many associated companies.

Matching

This technique involves matching a company’s inflows in a particular currency with the outflows in the same currency. It is an extension of netting and can be used for third party companies as well. Since the receipts of the company matches with the payment of the company, currency exchange risk is completely eliminated.

Leading and lagging

As the term suggests leading means paying in advance and lagging means delayed payment. It is a part of the credit terms and payments between firms and subsidiaries. Leading and lagging techniques may also be used between two independent firms if the lead payment receiver agrees on giving some discount to counter for the interest loss by the lead paying party.

Price variation

In order to counter for the currency fluctuation, companies may increase prices of products and hedge their chances of losses. This is usually followed by market leaders since any increase in prices may lose their market to competitors who don’t have such currency fluctuation risks.

Invoicing in foreign currency

An exporter can hedge his position and prevent losses by simply invoicing in the domestic currency. Invoicing in the currency in which one incurs cost eliminates foreign exchange risk for the exporter.

Currency diversification

Transacting in a single currency is extremely risky. In order to hedge the risk companies can diversify the currencies in which they transact. All currencies are not positively correlated and there is a good chance that some currencies may be negatively correlated hence an appreciation in one currency can be offset by a depreciation in some other currency.

External

It is referred to as active hedging. It involves taking contradictory positions in the derivative market to offset the losses in the cash market. External hedging requires a firm to first identify its exposure to the foreign exchange risk. The next step is to measure this exposure. The last step is to construct an opposite position in the derivative market that would offset the risk.

Forwards

It can be defined as an agreement between two parties wherein they agree on to a transaction at a future date but with a fixed pre-decided rate. Forward contracts are not regulated by any institution and are therefore solely mutual agreements between the parties.

Futures

This is a similar agreement as a forward with the only exception of it being regulated by a regulator. It is therefore safer as compared to a forward since each party in a sense enters into an agreement with the clearing house. It is subject to daily settlement procedure so that each party has a guaranteed claim against another party.

Options

An option gives the right and not the obligation to a holder to buy or sell a currency at an agreed price at a specific time. Thus options are a kind of an insurance that prevents loss from the bad side of the risk. For buying the option a party has to pay some premium to the party that sells the option. Options can be exchange traded or even OTC.

Swaps

In a currency swap two parties agree to settle a transaction of exchange of currencies at a specified time period. In a cross currency swap two parties make the payment of principal at the current spot exchange rates and agree to reverse the transaction at some future date but at the same spot price they transacted earlier.

Money market hedging

It is an alternative hedging technique to forwards, futures, options and swaps. Using a money market hedge an exporter or importer can hedge foreign future receivables and payables by locking the rate at the existing spot rate.

METHODOLOGY AND DATA SOURCES

The methodology section includes the methods used for conducting the research which includes the secondary research and primary research and its analysis.

Research Design

Secondary data has been collected related to impact of currency fluctuation on profitability of companies in various sectors in Indian scenario.

For the primary research data has been represented in the form of charts and graphs.

Data Collection (Secondary Data collection)

The initial data used in the literature review has been obtained from secondary sources and none of it from primary sources. Various sources have been used for carrying out this research. Data sources such as journals, published papers, books, press releases, magazines, RBI website, different search engines and internet sources have been used for the secondary data.

The analysis involves measuring the effect of fluctuation of currency exchange on the company’s revenues and cost and hence coming to the conclusion whether the company is positively impacted or negatively impacted by the appreciation of the rupee

Sampling

Sampling has been chosen as a method for carrying out the research

Steps in sampling

Defining the Target Population

Target population for this research is all the listed companies which have had currency exposures between the period April 2009 and Nov 2012.

Defining the Sampling Frame

The sampling frame for this research is BSE listed Indian companies where all the financial data is easily available.

Techniques of Sampling

Non Probability Sampling Technique is used as a technique of sampling for this research. In this technique sample is chosen on the basis of convenience of the researcher instead of any statistical tool. For this research companies from 5 sectors are chosen based on the availability of the data.

Sample Size

Sample size of this research has been kept to 5 industrial sectors which are IT, Oil marketing, Pharmaceutical, Auto and FMCG. At least 2 companies are studied per sector there by making the total analysis of 17 companies. Basically the impact of the currency fluctuation on the performance of the company is studied. Sample size is chosen as per the convenience.

The sample has been selected so as to have an overview of the sector and hence a company from the top 5 companies in each industry in terms of Market Capitalization/data availability has been selected.

Variables

The independent variables for the research are the fluctuation in exchange rate of dollar and the dependant variables are revenues and profit.

Data Collection (Primary Data collection)

For the primary data a survey was conducted at 50 Small and medium scale enterprises in the sector of IT, Capital goods, FMCG, Metals and others including gems and jewellery, textile, chemicals, etc.

The sectors are so selected so as to have the best representation of the industry.

Sampling

Sampling has been chosen as a method for carrying out the research

Steps in sampling

Defining the Target Population

Target population for this research are the small and medium scale enterprises that are located in Mumbai and have no exposure to foreign currency.

Defining the Sampling Frame

The sampling frame for this research is Mumbai based SMEs where the probability of having true answer is highest.

Techniques of Sampling

Non Probability Sampling Technique is used as a technique of sampling for this research. In this technique sample is chosen on the basis of convenience of the researcher instead of any statistical tool. For this research, companies across various sectors are chosen based on the availability of the data. The companies have been deliberately picked from SME segment so as to limit the chances of the company having any direct exposure to a foreign currency.

Sample Size

Sample size of this research has been kept to sectors which are IT, Capital Goods, Metals, FMCG and others. 10 companies have been surveyed per sector there by making the total analysis of 50 companies. Basically the impact of the currency fluctuation on the performance of the company is asked for in the survey.

The sample has been selected so as to best represent the small and medium scale industries in Mumbai and its suburbs.

Variables

The independent variables for the research are the fluctuation in exchange rate of dollar and the dependant variables are revenues and profit.

RESEARCH FRAMEWORK OF THE STUDY

Assumptions

Assumption made for the study is that the sample represents the population. In case of secondary data companies that are stated represent all the companies within that sector and in case of primary data the companies surveyed represent all a holistic view of companies that have no exposure to foreign currency.

Another assumption is that in the analysis of secondary data, by measuring the correlation of currency fluctuation and revenues and costs we are measuring its sensitivity to the currency fluctuation. Hence we are assuming that the instrument is valid and is measuring the desired constructs.

Hypothesis

From the primary and secondary research the hypothesis made is as follows:

Hypothesis 1: Companies that are Currency fluctuation plays a major role in the top line and bottom line of the company.

Based on the secondary research, 2 dependent variables (revenues and profit) have a direct relationship with currency fluctuation. The relationship means that, the higher the independent variables (export revenues, export profit, import costs) the higher the impact of currency fluctuation.

Hypothesis 2: Currency fluctuation has the strongest relationship with exporting/importing companies where as Non exporting/importing companies have less/no impact from currency variation.

DATA ANALYSIS AND INFERENCE

Analysis has been of the secondary financial data of companies in five sectors namely, IT, Oil marketing, FMCG, Auto and Pharmaceutical. This secondary data analysis is done to meet the objective of finding a trend in the entire sector and in case a trend is found to study the correlation between exports, imports and currency fluctuation using the dependant variables like Total expense of companies and revenue of companies impacted by currency fluctuation.

Fig1: US$/INR since Aug2009-Dec12

Secondary Data Analysis

Objective:

Impact of currency fluctuation on revenues and cost of companies

Evaluating the existence of a trend in the particular sector with respect to impact of currency fluctuation which can be generalised to all companies in that sector

Impact of currency fluctuation on Pharmaceuticals

The size of the Indian pharmaceutical industry is ~US$20bn, with exports accounting for US$9 bn. Many Indian companies in this space have seen a lot of acquisition from foreign entities such as Ranbaxy-Daichi, Piramal-Abbott, etc and many domestic firms have also acquired companies outside making it interesting to analyse whether a trend is found in most companies to suggest whether they would be positively or negatively affected by currency appreciation.

The Indian pharmaceuticals companies usually have ~20% of their imports for their raw materials. They also have exports to US market for their final product. Most companies have +net exposure to US$. But these companies also have operations in other countries hence they are exposed to those local currencies as well; their net exposure gets partly diluted. Also, for companies with large forex loans, there will be MarkToMarket forex losses. Hence if we see overall most of the companies have a minimal net exposure and hence this is no obvious trend that stands true for all companies

Cases:

Cipla: Derives 43% of net revenues in US$ and has 45% of raw material cost in US$.

Sun Pharma: Derives 58% of net revenues in US$ and has 62% of operating cost in USD.

Divi`s Lab: Derives 65% of its revenues in US$ while 45% of raw material cost is in USD.

Measures taken:

Depends on case to case scenario; most companies having close to zero net exposure position. Companies with exposure nay hedge their positions using future and options, currency swaps and other derivative instruments to hedge their positions.

Impact of currency fluctuation on FMCG

On the balance sheet exposure, companies are of the view that they have export sales and thus are allowed to route the MTM impact of currency depreciation on debt through balance sheet.

Case

Marico has ~US$120mm forex debt (which is 80% of total debt), mainly taken to finance acquisitions.

Godrej Consumer has lot of exposure to foreign exchange due to its foreign exchange loans it sought to acquire Darling Group Holdings which is largely unhedged. Normally uses forward exchange contracts to hedge its positions.

Dabur has more than US$100mm debts mainly for overseas acquisitions. It also has natural hedge as 70% of sales of Namaste which it acquired in 2010 are in US$. The Middle East business Dabur is also in US$ which further hedges the position of Dabur

Measures taken

Most FMCG companies such as HUL, Dabur and Godrej for their domestic sales hedge themselves by controlling the prices. Since these companies are B2C they have the controlling power to increase/decrease the end sales price.

During times of extremely high input prices of imported raw materials due to depreciating currency, these companies increase the sales prices of their end products to hedge themselves against currency fluctuation. Also most companies are global players hence most of their operations act as natural hedges to their exposure. There is no fixed pattern to generalise the effect of fluctuation of currency.

Impact of currency fluctuation on Auto Industry

The auto industry has various impacts due to currency fluctuation.

Firstly, if the domestic currency depreciates, imports of raw material for the auto industry will be expensive. This could reduce the profit margins. Also in case of depreciating rupee, exports will increase since it would make the product cheaper in terms of dollar in the foreign market. Hence the import and export could act as a natural hedge in case the imports match with the exports.

Another major impact of the depreciating rupee would be that the petrol prices would hike resulting in reduced consumer demand for automobiles. This would have a reverse impact on the industry.

Cases

Bajaj Auto: Derives 30% of net revenues from exports and has hedged 80% of exposure at Rs 46.5-47 and is therefore unlikely to see major impact of currency fluctuation.

Maruti: Imports from Japan are ~20% of net revenues and EUR exports are 5% of net revenues. Hence there is no need for hedging since US$ is naturally hedged.

Tata Motors: JLR revenues result 50% of foreign currency revenues in US$ while 30% of it in EUR imports. Hedging is done for six months. The company is a net export company and would therefore benefit from the depreciating of the rupee.

Measures taken

Most companies are naturally hedged due to their import for machine parts from developed markets and their exports to American and European markets. Also since the past few years Indian companies have acquired companies outside of India which has resulted in revenues in foreign currency offsetting the high imports of the companies.

Partial exposures that may be generated are almost completely hedged by the companies and only some positions may be left unhedged to cash in on speculation profits.

Impact of currency fluctuation on IT industry

The IT sector in India earns around US$60bn a year from export of software and services. The companies have direct incentive in the form of increased revenue in terms of increased revenue. Although this may not sustain too long since inflation may rise due to depreciating rupee causing the company to increase salaries which may offset the earnings.

In the IT industry in India it is observed that 1% INR depreciation aids EBIDTA margins by 40bps. However, net losses from hedges and translation will partly offset these gains.

Cases

TCS: Most impacted considering US$1.1bn in hedges which covers net inflows and no designated hedges of US$1.5bn, which are likely to see MTM losses. Hence, gains from translation are unlikely to make up for hedge losses; and the quantum is expected to be substantial.

Fig2: US$/INR vs TCS Net Revenues (Based to 100)

Correlation table:

Pearson Correlation Test

US$/INR

TCS

US$/INR

1

TCS

0.9206

1

Table1: Correlation between Net Revenues of TCS and USD/INR

The observation confirms the high positive relationship between exchange rate and net revenues.

Wipro: Currently it has a lot of open positions resulting in added revenues. Hence, translation gains could make up for the losses from ineffective hedges during the year.

Fig3: US$/INR vs WIPRO Net Revenues (Based to 100)

Correlation table:

Pearson Correlation Test

US$/INR

WIPRO

US$/INR

1

WIPRO

0.8962

1

Table2: Correlation between Net Revenues of WIPRO and USD/INR

The observation of correlation test shows that there exists an extremely positive relationship between the currency exchange rate and the net revenues of the company. The correlation coefficient is 0.8962 which confirms the high positive relationship explained as per theory.

Tech Mahindra: Net loss on derivative instruments of Rs120.6crores recognised in hedging reserve as of March 31, 2012

As at March 31, 2012, the Company has net foreign exchange exposures that are not hedged by a derivative instruments or otherwise amounting to Rs707.4crores

Fig4: US$/INR vs Tech Mahindra Net Revenues (Based to 100)

Correlation table:

Pearson Correlation Test

US$/INR

Tech Mahindra

US$/INR

1

Tech Mahindra

0.7977

1

Table3: Correlation between Net Revenues of Tech Mahindra and USD/INR

The correlation coefficient for Tech Mahindra is a little less as compared to its peers since its position are highly hedged as compared to its peers leaving less room for any forex advantage.

But the higher ratio still validates the high positive correlation between foreign exchange rate and its revenues.

Mahindra Satyam: respect of all such contracts outstanding as on March 31, 2012, that were designated and effective as hedges of future cash flows, loss aggregating Rs343 mm.

Fig5: US$/INR vs Mahindra Satyam Net Revenues (Based to 100)

Correlation table:

Pearson Correlation Test

US$/INR

Mahindra Satyam

US$/INR

1

Mahindra Satyam

0.9052

1

Table4: Correlation between Net Revenues of Mahindra Satyam and USD/INR

Mahindra Satyam has a very high correlation coefficient indicting that there exists a high positive correlation between the foreign exchange rate and net revenues.

Infosys: Has US$750 in hedges spread over the next two quarters with an MTM at Rs44.7 as at end 1QFY12. Infosys is also likely to be relatively less impacted.

Fig6: US$/INR vs Infosys Revenues (Based to 100)

Correlation table:

Pearson Correlation Test

US$/INR

Infosys

US$/INR

1

Infosys

0.9378

1

Table5: Correlation between Net Revenues of Infosys and USD/INR

Just like most of its IT peers Infosys also has a positive correlation between its net revenues and the foreign exchange rate. The correlation coefficient is 0.9378 which is the highest among all its peers showing that as soon as rupee depreciates, there is a direct positive impact on its revenues.

Measures taken

Big IT companies such as Wipro, TCS, and Infosys Technologies, hedged their bets by expanding in countries such as China where costs are lower. They also expanded business to regions where the currency is highly stable such as Latin America and Europe.

Impact of currency fluctuation on Oil Marketing companies

The Oil Marketing industry has ~80% of their raw materials as imports. Refining profits benefit from rupee depreciation, but crude purchasing records forex loss.

Cases

HPCL: Hindustan Petroleum has interests in two Egyptian blocks and is thereby exposed to foreign exchange risks due to its foreign loans. But the foreign revenues naturally hedge the probable losses by a small margin.

Fig7: US$/INR vs HPCL Total Expenditure (Based to 100)

Correlation table:

Pearson Correlation Test

US$/INR

HPCL

US$/INR

1

HPCL

0.7227

1

Table6: Correlation between Net Revenues of HPCL and USD/INR

The correlation coefficient is 0.5567 which confirms about a positive relationship between foreign exchange rate and the expenditure which includes the cost of importing crude oil which becomes expensive when rupee depreciates.

IOC: Has entered into 16 Forward Contracts in US$ amounting Rs 379.8 crores

Fig8: US$/INR vs IOC Total Expenditure (Based to 100)

Correlation table:

Pearson Correlation Test

US$/INR

IOC

US$/INR

1

IOC

0.5567

1

Table7: Correlation between Net Revenues of IOC and USD/INR

The correlation coefficient is 0.5567 which confirms about a positive relationship between the foreign exchange rate and the expenditure which includes the cost of importing crude oil which becomes expensive when rupee depreciates. Also the oil marketing companies have some exports and variation in import customs which may marginally offset the effect of depreciating currencies.

Measures taken

Oil marketing companies such as HPCL and IOC hedge their bets by expanding in countries such as China where costs are lower. They also expanded business to regions where the currency is highly stable such as Latin America and Europe.

Primary Data Analysis

Objective:

To evaluate the impact of currency fluctuation on companies that doesn’t have foreign currency exposure.

Observation:

From the primary research which has been conducted surveying 50 small and medium scale enterprises, it has been seen that 22% of the companies have agreed that they are impacted by currency fluctuation whereas 48% agreed that they are moderately impacted by currency fluctuation while 30% are not impacted by currency fluctuation.

Fig 9: Survey conducted in the following sectors

Fig10: Results based on the survey

Also of the 35 who agreed that they are impacted by currency fluctuation, 7 of them agreed to have taken some steps to tackle the problem while 28 of them are passive and don’t take any initiative to tackle the problem.

Fig 11: Results based on the survey

Analysis:

Although it may sound illogical that how can a company be impacted by currency fluctuation when it doesn’t have any import or export in foreign currency.

But on surveying these small and mid size companies belonging to various sectors it was found that currency fluctuation does impact the company’s revenues and profits.

Just for the sake of understanding consider a company A, which is in the manufacturing of detergent. The detergent is manufactured locally and is marketed locally as well. The competitors of the company include HUL and P&G which has a lot of raw material imported. In case that the rupee depreciates, cost of raw material for HUL and P&G will rise while the cost for company A remains constant. In such a scenario the local manufacturer is bound to stand at a cost advantage as compared to the importers. An assumption is made for considering this case that the domestic inflation in under control otherwise the currency depreciation would inflate the cost for local procurement of detergent as well which would offset the cost advantage for the local company.

Other cases where such a scenario could occur of local company benefiting or losing without direct exposure to foreign currency could include traders or middlemen or local manufacturers that deal in B2B businesses and whose client or supplier is affected directly by currency exposure.

Also it is observed that currency fluctuation affects those companies most where the product is a commodity or lacks brand advantage so that the demand may fall or rise depending on whether it is available cheaply or is expensive.

SUMMARY, CONCLUSIONS AND RECCOMENDATIONS

Summary

The research has been conducted for the five sectors mentioned as Oil marketing, Auto, FMCG, IT and Pharmaceutical companies. The research was conducted to evaluate the trend if found in the researched sectors, impact of currency fluctuation on revenues in export companies and cost in import companies and impact of currency fluctuation in companies that don’t have any foreign exposure.

Conclusions

From the correlation calculation it is clear that in case of :

Oil marketing companies: Cost is directly impacted by the currency fluctuation since the companies have a lot import and any currency fluctuation can inflate/deflate its cost dramatically.

IT companies: Revenue is directly related to currency fluctuation since the IT companies have a lot of exports.

In case of Oil marketing and IT companies there is a direct impact of the currency fluctuation which seems to be general for the entire sector. In case of FMCG, Auto and Pharmaceutical companies there is no clear trend that can be generalised for the entire industry. For these companies impact of currency fluctuation is circumstantial.

Also in this global situation from the primary research it is clear that a company that may not have direct exposure to any foreign currency still faces the impact of currency fluctuation.

Also from the impact and the importance of hedging it is clear that no company can afford to keep their currency exposure unhedged.

Scope and Recommendations

The data from the analysis of the data clearly shows that various sectors are differently impacted by the fluctuation in the currency rate. Some sectors as shown are positively impacted by the currency appreciation whereas some are profitable for the reverse situation.

Also the research shows that various sectors have different methods to tackle the problem of currency fluctuation and all sectors cannot have same one solution.

For further researchers it would be better to take more companies in the same sector and to then evaluate the impact on each sector and have a better understanding of each sector for currency fluctuation.

Also further researchers can look at reasons as to why companies use different techniques to tackle the same problem.

Limitations

The research is limited to only 5 sectors and moreover only a few companies in the particular sector as samples. The data is not exhaustive so as to say that all companies in the same sector will always have an equal impact.

The financial secondary data assumes that the companies are having the same patterns of imports and exports. Also the data doesn’t take into account other macroeconomic factors which may affect the data.

The period considered for data collected is 2 years and 6 months and it may be possible that in case the time period for the observation is increased results may be influenced.

The time is deliberately chosen from Sep 2010 since one year prior to that the results may be influenced due to global economic improvement and other macroeconomic factors seen worldwide which followed global recession of 2008.

Type of Industry

Impact from Depreciating INR

Exposure Impact

Hedging instrument

IT

Positive

Heavy

Forward contracts

Oil Marketing

Negative

Heavy

SWAPS/Future contract

Auto

Positive

Marginal

Forward Contracts

Pharmaceutical

Neutral

Marginal/Nil

SWAPS/Derivatives

FMCG

Neutral

Marginal/Nil

Price variation/Options

Table8: Summary of industries used for research

APPENDIX

Questionnaire for the survey

Q1. Does your company have exposure to foreign currency?

Q2. Are you positively or negatively impacted by currency appreciation?

Q3. What is the impact of currency fluctuation on your top line and bottom line numbers?

Extreme

Moderate

None

Q4. Have you hedged your position for currency fluctuation?

Q5. Do you follow a particular technique for hedging?

Financial Data used for calculation of correlation coefficients

Net Revenues (in crores) except US$/INR

Date

US$/INR

Infosys

Wipro

TCS

Tech Mahindra

Mahindra Satyam

Sep-10

46.38

6,425

6,557

7,267

1,492

1,151

Dec-10

44.75

6,534

6,623

7,627

1,181

1,194

Mar-11

45.20

6,668

7,178

7,970

1,199

1,278

Jun-11

44.64

6,905

7,311

8,614

1,234

1,329

Sep-11

45.75

7,470

7,805

9,329

1,267

1,479

Dec-11

50.74

8,696

8,317

10,544

1,381

1,605

Mar-12

50.22

8,183

8,621

10,372

1,360

1,551

Jun-12

54.01

8,909

8,933

11,411

1,495

1,738

Sep-12

55.12

9,129

9,082

11,926

1,508

1,781

Net Expenditure (in crores) except US$/INR

Date

US$/INR

HPCL

IOC

Sep-09

48.36

24,457

60,356

Dec-09

46.58

27,520

69,363

Mar-10

45.94

30,007

69,931

Jun-10

45.53

30,835

74,590

Sep-10

46.38

28,387

70,446

Dec-10

44.75

33,276

77,606

Mar-11

45.20

37,692

92,940

Jun-11

44.64

43,485

1,03,146

Sep-11

45.75

39,974

86,725

Dec-11

50.74

44,345

1,04,484

Mar-12

50.22

46,927

1,13,695

Jun-12

54.01

52,952

1,16,839

Sep-12

55.12

46,216

94,440