Re's rise against euro may hit IT, textiles cos.

MUMBAI: The rupee’s spectacular gains against the euro so far in 2010, could erode margins of several IT and textile firms and further shrink India’s already declining trade with the European Union, say analysts.

The local unit has risen more than 11% against the European unit in 2010, amid mounting speculation that Greece could default on its sovereign debt. The rupee, which quoted against the euro at 66.61 in December, ended Friday on 59.26.

The partially convertible rupee ended at 44.28/29 per dollar, off an intra-day peak of 44.23, its highest since September 8, 2008, and 0.4% stronger than Thursday’s closing of 44.46/47.

“IT companies’ costs stay where they are, but their revenues are denominated in euro and dollar, which have depreciated strongly,” said Dipesh Shah, an IT analyst at Khandwala Securities, predicting that the margins of companies could suffer for the March quarter. He feels that on a year-on-year basis, the currency depreciation is still modest. So Indian companies aren’t really losing out their competitive advantage on the business front, he said.

Another analyst pointed out that the final accounting of profits and losses — irrespective of the client’s country — is done in dollars. The euro falling against the dollar will hurt in this respect (6.6% in 2010), he explained.

Other industries like textiles are also expected to take a hit, but the impact here is expected to be more modest.

“A large impact is unlikely,” said Sunil Khandelwal, CFO of Alok Industries — one of the largest textile companies in India. He estimates that export to Europe account only 10-15% of the total exports of the Indian textile industry while most of the payments are in US dollar. However, he warned that small companies could feel the maximum heat since they do not have access to currency hedging instruments unlike large companies.

However, there’s a feeling among some economists that Europe’s ongoing crisis could hurt India’s revival of exports, although the effect could be small. The European Union accounts almost 20% and 14% of India’s total export earnings and import payments, respectively.

As per commerce ministry data, exports to the EU declined in April-July 2009 quarter (32.4%) against a 46.2% growth in the comparable period in the previous year. The volatility in the euro against majors has given a fillip to the euro-rupee futures on stock exchanges, with volumes in the segment rising sharply in April.

Meanwhile, the yen fell for a second straight day against the euro on Friday as speculation grew that Greece will get an international bailout to avoid a default, thus affecting demand for safe-haven currencies.

Source : The Economics Times