Who wrote this article?

Deepak Shenoy, Capitalmind's research team.

SAIL Results: Down 55%, Shady Forex Move

The latest SAIL results had this to say:

vi) Due to unusual and steep depreciation in the value of the Rupee against US Dollar

and Euro during the current quarter / half year, the foreign exchange fluctuation loss of

a) Rs. 508.72 crore for the current quarter and Rs. 520.37 crore for the current half year

on short term foreign currency loans have been considered as an ‘Exceptional Item’

by the Company; and

b) Rs.163.83 crore for the current quarter & Rs.163.26 crore for the current half year

on long-term foreign currency loans have been adjusted in the carrying cost of the

Fixed Assets/Capital Work-in-progress, in accordance with Companies( Accounting

Standards) Amendment Rules 2009, relating to Accounting Standard 11, notified

by the government of lndia on 31” March 2009.

The concept is like this.

SAIL has loans in foreign currencies. Not all that exposure is hedged.
The rupee depreciated nearly 8% last quarter – meaning, SAIL has to pay 8% more rupees today to pay back the loan.
This is a loss, because it’s effectively excess interest that needs to be paid. If there is a forex gain (if the rupee appreciates) we must have a profit.
Some of this loss – the 508.72 crore they mention in a) above – has been taken on to the profit and loss statement, taking their profit down nearly 55%.

While the 508 cr. “exceptional” items is only this quarter, which seems to be on short term loans taken in this very quarter. That means earlier when the rupee appreciated there were no such loans and no cause to book such profits.

Also note that profit before exceptional items was any way lower (1224 cr versus 1592 cr last year), so Sail has operational issues as well.

The WTF

Worse, in point b) above they mention that they have EVEN more losses (Rs. 163 cr. worth) on the rupee, that they’ve adjusted against reserves.

Assume you are SAIL. You took a loan at Rs. 40 to the dollar, of $100, to buy some “fixed asset” – let’s say a darn cheap furnace. That’s Rs. 4,000 that goes into your balance sheet, and every year, you depreciate it down – say 10% a year, so about Rs. 400 per year. You have debt of $100, which is payable at the end of two years.

Now the rupee goes from Rs. 40 to Rs. 44 per dollar, which means your loan of $100 needs a repayment of Rs. 4,400. The excess Rs. 400 is the increase in the exchange rate, which should hit your profit and loss account (P&L). But no, even when ICAI has said explicitly that companies should take the P&L route, they find a loophole that the government opened for them.

They now tell you that because they took the loan to buy a fixed asset, even the increase in cost should be “depreciated” rather than taken at once. So they just mark-up the value of hte purchased item to Rs. 4400 instead. That extra Rs. 400 only gets “depreciated” along with the physical asset, over years!

This seems like cheating, but one might give them some leeway. The real problem is that when the rupee reverses direction (and goes up) they forget all about this “reserves” bit and directly take the gains on P&L (which will show higher EPS and therefore is attractive). Jugaad on the way down, but proper on the way up. That bit I do not like at all. (See post on RCOM which has been accused similarly)

I sometimes wonder why I bother with fundamentals. It’s all magic tricks, and spinning webs.

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