The global economic crisis is beginning to weigh heavily on India Inc���s balance sheet, courtesy the depreciating rupee. While a weakening rupee might bring cheer to export-oriented sectors such as IT and textiles, it has pushed up the foreign exchange liabilities of Indian companies.

Accounting rules, called AS-11 provisions, make it mandatory for companies to make mark-to-market provisions in their profit & loss accounts for any changes in foreign currency loans. The worst hit have been those companies that predominantly serve the domestic market and opted for foreign currency loans to finance their growth plans.

According to an analysis by ETIG, the profitability of companies will be dented by mark to market (MTM) losses. Tata Steel may report a forex loss of around Rs 344 crore, whereas Tata Motors could take a hit of Rs 311 crore. Tata Chemicals, which took a foreign currency loan of $475 million to fund its overseas acquisitions, is estimated to report a forex loss of Rs 187 crore. Ranbaxy, JSW Steel and Firstsource Solutions will lose Rs 100 crore and Rs 400 crore each. The list of companies is not exhaustive as an estimated dozen companies raised forex debt last year.

Thankfully, this is only an accounting entry and does not affect the cash flows. However, it is likely to be read negatively by the stock market. Market participants actively track companies��� net profits and any adverse development does affect valuations. The rupee had positively impacted most of the above companies till last year, but it has depreciated by over 9% in the quarter ended September 2008.

When the rupee depreciates, the value of foreign currency liability denominated in rupee terms increases and vice versa. According to AS-11 stipulations, an increase in liability should be reflected in the quarterly profit and loss statement and will translate into lower corporate profits. Most companies are focused on the domestic market and are therefore unlikely to benefit from a weakening rupee.

The falling rupee will severely affect the small companies, whereas the big ones will be impacted only moderately. Firstsource Solutions may report a net loss, while Tata Steel might see a 100 basis points decline in net profit margin on account of forex losses. To put things in perspective, most companies will experience a 10-50% hit on their operating profits.

Companies such as Reliance Communication, Reliance Industries and Bharti Airtel follow schedule-VI of the Companies Act, instead of AS-11 and are therefore unlikely to see an impact on their quarterly profit and loss statements. The operating profits of the two Reliance companies would have been lower by around Rs 800-900 crore if they had subscribed to the AS11 norms.

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