As the rupee collapses, India Inc's long term plans fall short

Companies such as Whirlpool of India Ltd say they can’t plan more than a couple of months out as a fast-falling rupee currency drives up the cost of imports, forcing them to raise prices even as consumer spending crumbles.

The timing is particularly tough for consumer companies that were counting on India’s September-to-December holiday season to spur sales. India’s consumers, whose spending helped see the country through the global financial crisis in 2008, are closing their wallets, squeezing companies from carmakers to shampoo sellers.

Companies that import finished goods or raw materials are the worst hit as they scramble to hold onto margins while balancing the need to raise prices without deterring buyers.

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“We are now planning for a month or three months at best unlike six months or a year earlier,” said Shantanu Dasgupta, vice president for corporate affairs and strategy at Whirlpool of India, the local arm of Whirlpool Corp, the world’s largest home appliance maker.

The rupee has tumbled 17 percent so far this year and hit an all-time low of 66.30 against the dollar on Tuesday, resisting a spate of interventions by the Reserve Bank of India (RBI) and the government as investor fears about emerging markets deepened in anticipation of reduced U.S. monetary stimulus.

[caption id=“attachment_1066243” align=“alignleft” width=“380”]  Whirlpool India is now planning for one to three months compared to its usual six month plan. Reuters[/caption]

“A week back in our office we were working at (a rupee exchange rate of) 62 and now it’s at 64 and looks like soon it will fall more and hit 67. How can a business operate when the currency is on a free-fall?” H.S. Bhatia, head of the enterprise business at television maker Videocon Industries (VEDI.NS), said in an August 21 interview.

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The currency sell-off has since intensified, compounding difficulties for Videocon. The collapsing rupee pushes up prices of goods, adding to inflation on top of meagre urban salary hikes and an economy growing at its slowest in a decade.

Videocon imports raw materials and is planning to raise prices by about 4 percent to 5 percent in the coming days, its second hike in 2 months.

The currency blow is landing just as consumer companies look toward a boost from their strongest annual sales period, which starts in September with Ganesh Chaturthi, when the god of luck and prosperity is welcomed into Hindu homes, followed by the Diwali festival and then Christmas.

India’s total consumption expenditure, which includes private and government spending, grew 3.3 percent in Jan-March 2013 from 9.3 percent in the same period a year earlier, according to government estimates. Total consumption expenditure as a share of the country’s gross domestic product fell to 65.9 percent in the fourth quarter of 2012/13 from 72.1 percent in the first quarter of the same fiscal year.

SLOW SLOW SLOW THE BOAT

Shoppers are not only cutting back on big-ticket purchases such as refrigerators, TVs or expensive branded apparel but even staples including soaps, ketchup and cosmetics.

A survey by the Associated Chambers of Commerce and Industry in June found monthly bills for the middle class jumped by 15 to 20 percent in a month across major cities as the falling rupee drove up prices of petroleum products and edible oil.

A paper in August by the same group found that even deep-pocketed consumers were cutting back, with five-star hotels and fine dining restaurants registering a decline of 20 percent in sales in the past three months after prices of imported food ingredients and spirits rose.

Makers of consumer goods like shampoos and soaps, popular defensive plays in weak economic times, are also feeling the pinch, with market leader Hindustan Unilever Ltd (HLL.NS) posting lower sales volumes for a fifth consecutive quarter in the June period.

“India is witnessing a slowdown and only recently in the past one quarter has it been so pronounced,” said Manish Tiwary, executive director of sales and customer development at Hindustan Unilever.

Apparel retailer Provogue India Ltd (PROV.NS) has shut several stores in the past 12 months and is moving cautiously on expansion with a focus on franchisee-operated stores.

“It is a tough environment to operate in and Indian consumers are seeking even more value in the current market which impacts both sales density and margins,” Provogue business head Timothy Eyon said.

The country’s largest retail conglomerate, Future Group has an added problem as it tries to reduce the 40 billion rupees debt on its books.

Its plan to raise 6 billion to 8 billion rupees this fiscal year by offloading stakes in fashion brands to strategic and private equity players has been hit as the rupee volatility and weak capital market conditions have spooked investors, Group Chief Financial Officer C.P. Toshniwal said.

IMPACT WITH A LAG

While many consumer companies have resorted to price hikes to cope with the currency, long-term supplier contracts and hedging are helping some to bite the bullet for now.

Daimler AG’s (DAIGn.DE) Mercedes-Benz has held off on a price hike even though it faces severe margin pressure from the sliding currency and rising fuel costs, but it may relent soon.

“We didn’t get immediately affected by the weakening of rupee as we have a long-term hedging strategy. However the hedging period cannot be forever and we have to ensure that we run a sustainable business in the long term,” Eberhard Kern, managing director at Mercedes-Benz India said.

Similarly, branded apparel maker Lacoste India is expecting a hit on its margins but will hold off on a price hike until the end of the year, Rajesh Jain, director and chief executive officer said. The company imports raw materials like yarn, but long-term supply contracts have so far insulated it from currency-related price increases of 15 percent.

However, that will be small comfort if demand stays weak.

“Growth has come to a grinding halt but that’s not the only bad part,” Whirlpool’s Dassgupta said. “Demand is not likely to improve anytime soon and that’s more worrying.”

Reuters