Mpact of global crisis on the earnings of it & textile cos

Impact Of Global Crisis On The Earnings of IT & Textile Cos

Dark days are looming ahead for some of the leading export-oriented firms in India. This, despite the fact that exports for April-July this year were 54% higher than that in the corresponding period last year. Now, this figure is beginning to shrink, with the Commerce Ministry cautioning last month that the surge was not sustainable and that a contraction in export orders was expected in the coming months.

In fact, the country's low factory output in August, which grew at its slowest pace in 29 months, has been attributed to the reducing export volume.

The impending fall in exports has been ascribed to the possible double dip recession in the US and the deteriorating debt situation in Europe. These will translate into lesser demand for imports from these regions, which currently account for more than 35% of India's global exports. This will hurt domestic exporters even though they are not feeling the pinch right now.

"The prospect for export-oriented companies are surely under a cloud as growth has shrunk dramatically in the West," says Sachidanand Shukla, chief economist, Enam Securities.

Adding to the exporters' woes is the government's decision to slash tax incentives on exports from 1 October. It has done away with the Duty Entitlement Pass Book (DEPB) scheme, a popular tax break for exporters. Under DEPB, they were reimbursed on the customs duty paid on an imported input as a percentage of the export price. This scheme will be replaced with a transitional duty drawback scheme.

Though the new schedule would include more eligible items (1,100 additional items), the rates are 2-3% lower than those under the DEPB. For many exporters, these tax incentives had served as a cushion against rising input costs and high interest rates. As such, a reduction in tax benefits will impact their margins.

However, there is some respite for exporters on the currency front. With the rupee depreciating vis-á-vis the dollar and the euro, Indian exporters can now earn higher revenues in rupee terms for the same quantity of goods sold. The rupee recently fell to its weakest level against the dollar in over two years, from sub-43 levels to touch 49 on 27 September.

Though this is good news for exporters, they are worried about the high fluctuation in the currency market. Besides, the currency slide won't help if the demand for goods and services from other countries goes down. Says DK Joshi, chief economist, Crisil: "The contraction in demand will have a much bigger impact than the revenue buoyancy caused by the rupee depreciation."

A higher exposure to safer destinations, such as Africa and the Middle East, can help cushion exporters against the downturn. The share of these developed markets in India's export trade is slowly increasing, which is a healthy trend. "A firm with a higher geographic concentration of exports towards the US and Europe can expect difficult times ahead," says Shukla.