In the current scenario, most traders are opting for hedge funds. According to industry experts, this guards against a falling rupee, but foregoes gains if the rupee rises during the period. Traders also warn against too much hedging as it can be counter-productive
By Richa Chakravarty
Monday, October 07, 2013: Imports of electronic goods and components came to a halt in the beginning of Septeber, fortnight, with the rupee hitting an all time low of Rs 68.75 against the US dollar last month. Hovering close to around Rs 64-65 currently (Sept 15), the rupee has fallen by over 33 per cent in the last two years. This has badly affected electronics trading, with no indications of stability in the market, going forward. The electronics industry per se is running at a loss of 10-20 per cent, as electronic goods rank third amongst the items India imports the most, amounting to a value of US$ 32 billion in 2012-13.
Panic was palpable among the traders as they spoke to Electronics Bazaar. Sales dipped to an all time low. Small traders do not book dollars in advance at a fixed rate, hence the daily fluctuation in the rupee hits them hard. They also lack the financial resources to bear large losses from rupee fluctuations. Most traders are either negotiating with suppliers for lower prices or asking for more time to make payments.
Low stock maintenance leads to long lead times The electronics trading market has now adopted a very conservative approach by importing only selective and necessary items. “The market situation is volatile and we are only importing items on demand. We can-not predict the currency trend now, therefore we are not placing any orders because of the variation in price between when an order is place and the eventual shipment, says GS Sharma, proprietor, Shri Ram Marketing. This Delhi-based electronic components distributor informs, “Since July, it has been a lean period for the electronics industry, and due to the instability, there is no demand in the market. In the past five months, our sales figures have dropped by 30-40 per cent,” laments Sharma.
With imports getting costlier, traders are not maintaining any stocks. Hence, business is happening with lead times of a minimum 10-15 days. Shares Vikas Minocha, proprietor, Cosmic Devices, a Delhi-based trader and supplier of industrial electronic components, “As stockists are not making any fresh imports, they are supplying from their earlier stock and that too at a hiked rate. If this scenario continues for long, they will soon run out of stock. This, in turn, will affect the lead times further, resulting in deliveries that are behind schedule.”
Consumers bear the burden
The falling rupee has hit the end user directly. As the traders have to shell out more money to procure products, they are passing this cost onto their customers. “We are left with no option but to hike the cost of products, and also squeeze our profit margin. We are also asking our customers to make amendments in the buying contracts as the fresh supplies now cost more. Customers, particularly those who work with the government through tenders, feel the impact more as the government provides no provision for the amendment for prices,” shares Sunil Hasija, managing director, Electronika Sales Pvt Ltd, a Chennai-based electronic components distributor.
No long credit timings
Electronics trading is mostly based on credit, but observing the current scenario, traders have stopped credit payments, leading to further dip in sales. Informs Sunil Hasija, “We procure items with 30-45 days of credit, so while making payments, we had to bear a loss as the rupee has already depreciated. Indian customers also pay between 60 and 90 days, so here again we lose money as the market keeps fluctuating. There should be faster rotation of money with shorter credit periods. In the past five months, Electronika Sales has incurred a loss of about Rs 200 million.
Hedge funds
In the current scenario, most traders are opting for hedge funds. The easiest way for an importer to hedge is to buy a contract to purchase dollars at a predetermined rate on a future date, also known as a dollar-rupee forward contract. According to industry experts, this guards against a falling rupee, but foregoes gains if the rupee rises during the period.
The traders also warn against too much hedging as it can be counter-productive. “Hedging our funds is the only means to safeguard our business. Most of the traders are going in for quarterly hedging and adding it to their costs, while selling to the customers,” says Mitesh Mody, managing director, Bhavna Electronics.
Generally, companies hedge with their banks. This is called forex hedging, which is like paying a premium on foreign currency. “In case dollar prices go up, traders have the benefit of paying the same amount (irrespective of the hike) at which they had frozen their price. But in case the dollar price declines, traders end up making losses as they have to pay the premium to the bank,” explains Mody.
Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine
