Falling Rupee and how it affects you?

Rupee fell for eighth day consecutively on Wednesday to finish at 52.36 against USD. So there's been hype in the market on falling Rupee against USD. We can't blame anybody for this. This is a massive outcome of various things like Eurozone crisis, instability in global equity markets, etc. Investors are looking for safe investment horizons like government bonds that could shield them against any financial vulnerability.

India's central bank, RBI, is closely watching the situation is expected to issue rupee denominated corporate bonds to overseas investors to boost the ailing rupee. Also it plans to buy around Rs. 100 billion worth government bonds to ease the pain on Rupee. The Rupee has lost around 8% against USD since April.

Though the US economy is in a bad condition, factors like Europe's failure to bail-out the countries which are in financial trouble, make the investors' confidence to ruin on Euro. All these factors pushing up the USD value against many currencies (good or bad, it's USD getting the hit!). So one could expect the Rupee to gain in Q1 2012 as the European economy is expected to get some sort of bail-outs from the governments. Once the global confidence among investors roll back, then we could say that Rupee might be back on track against USD (in the range of 45-47).

Decrease in value of the Rupee is good for the people who are working abroad and sends money to their families here. Also, the imports get dearer. There might be increase in price of goods like mobile phones, laptops, TVs, etc in coming months as the import prices would be higher. Energy companies (like oil importers) would also bear the brunt by paying more on importing oil (no surprises if the fuel prices go up!). Exports would be less valuable now and companies that export goods to abroad could expect their top line revenues to come down. Many Indian IT companies that weren't prepared for this free fall of rupee would certainly face the heat in this quarter.

Will Kingfisher Airlines survive?

Everybody is talking about the financial position of Kingfisher Airlines, the second largest carrier in India with a market share of around 20%. Speaking only based on the financial numbers, yes, Kingfisher is in a dire situation. But before arriving at any conclusion, let's review about its recent quarterly results (three months ended Sep 30, 2011).

1. Revenues decreased by 19% Q-o-Q, may be an overall effect in the industry
2. Fuel expenses went up to a new level of 53% of revenues
3. Employee costs also went up by 5% Q-o-Q, constituting around 12% of revenues
4. Both Fuel and Employee expenses accounted for 65% of total revenues in this quarter, should really be a concern for Kingfisher
5. Cash at bank was about $44M at the end of the quarter, around more than 21% of short term loans payable within a year (as of March 31, 2011)
6. Total secured and unsecured loans as of March 31 ~ $1.4 billion
7. Kingfisher announced in its earnings call that it may require only around $100-$150M to meet short term needs (working capital)
8. There are some flip side as well -

- passenger load factor was down to 77%, compared to 82% in the same period last year
- reported a EBITDAR loss of around $25M, since two years
- reported a net loss of around $94M

Interesting to note is that around 75% of revenues were from domestic operations. So, increase in fuel costs in India would obviously have its impact on the margins of Kingfisher. Jet fuel costs are surcharged at a higher rate than many other countries, it's around 50-60%, which made the airliners to shed more money on fuels in India. This was the biggest cause for this financial mess at Kingfisher, followed by the increasing staff costs.

Fuel expenses were 'higher' in the previous quarter (Q1 2012), which Kingfisher was able to overcome due to its increase in revenues in that quarter. There were factors that made Kingfisher hard times this quarter - increasing fuel costs, employee costs and decreasing value of rupee against dollar.

Though the company is making all measures to cut costs like shutting operations in few loss making routes, Kingfisher has no other option.

All the company needs is an infusion of around $100-150M to save its day-to-day operations running. I think it can made it easily by various measures like selling more equities or converting debts to equities to sell stakes to the creditors, etc. Also the talks have already been through with various banks in India.

All the airliners in India are running in losses and this mounting debt may not be a 'significant' problem for Kingfisher and I hope the company would come up from the crisis and this would be a lesson for all the operators in India to tackle their working capital efficiently in order to maintain day-to-day business operations without any financial hitches.