Tiruppur exporter: who keeps the rupee's fall?
A Tiruppur knitwear exporter has a confirmed order book of $6.0 million for the next twelve months, priced in dollars and fixed. Imported yarn and dyes make up $2.0 million of its inputs; wages, power, processing and compliance are all domestic and cost ₹28 crore a year, and the firm treats them as fixed for the year. When the order book was signed the rupee was ₹83 to the dollar; it is now ₹86. Buyers in the US and EU have already begun asking for a 3% price concession, citing quotes from Bangladesh and Vietnam, where currencies have moved differently against the dollar. The promoter wants to book the whole currency gain as profit and use it as the first tranche of equity for a new processing unit. His banker is more cautious, noting that the central bank has been selling dollars to slow the slide, and asks what the firm would do if the rupee returned to ₹83 within the year.
1. Compute EBIT at ₹83 and at ₹86 with no price concession, and at ₹86 with a 3% concession. Which position leaves the firm worst off?
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At ₹83, no concession. Revenue = $6.0m × 83 = ₹49.80 crore. Imports = $2.0m × 83 = ₹16.60 crore. Domestic cost ₹28.00 crore. Total cost = ₹44.60 crore → EBIT ₹5.20 crore.
At ₹86, no concession. Revenue = $6.0m × 86 = ₹51.60 crore. Imports = $2.0m × 86 = ₹17.20 crore. Domestic ₹28.00 crore. Total cost = ₹45.20 crore → EBIT ₹6.40 crore (gain of ₹1.20 crore, +23%). Note the gain is not 3.6% of revenue: the dollar moves both sides, so it is 3.6% of (revenue − imports) = 3.6% of ₹33.2 crore ≈ ₹1.20 crore.
At ₹86 with a 3% concession. Revenue = $5.82m × 86 = ₹50.05 crore (a 3% cut removes ₹1.55 crore). Cost stays ₹45.20 crore. EBIT ₹4.85 crore.
So the worst of the three is ₹86 with the concession - ₹0.35 crore below the ₹83 base case, even after a favourable currency move. A 3% concession on price destroys more than a 3.6% currency gain creates, because the concession applies to gross revenue while the currency gain applies only to the net dollar exposure.
2. Explain why a weaker rupee is not automatically expansionary for this firm, and what determines who ultimately keeps the gain.
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Four mechanisms, all visible in this firm's numbers.
Import content. Imports are $2.0m against $6.0m of revenue - a third of the cost base moves with the exchange rate in the same direction as revenue, so a third of the gain is self-cancelling. A firm with no imported inputs would keep far more.
Competitor currencies, not the rupee. The relevant comparison for a US buyer is the price in dollars against Bangladeshi and Vietnamese suppliers. If the taka or dong has also weakened against the dollar, the Indian firm's dollar price must fall to stay level, and the gain is competed away. The concession demand is evidence this is already happening.
Pricing power. The gain accrues to whoever can hold price. In commoditised knitwear with switching buyers, that is the buyer, not the exporter - which is why the concession request arrives within weeks rather than at renewal.
Timing. The order book is fixed for twelve months, so there is no volume response this year at all; any J-curve benefit (volumes rising after prices fall) would arrive after the contracts that matter here have been executed. A weaker rupee changes margins first and volumes much later.
3. What should the firm do with the gain, and what does the central bank's dollar-selling imply for its planning?
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Do not treat ₹1.2 crore as recurring earnings. It is a valuation windfall on a fixed order book, not an improvement in the business. Capitalising it into a processing unit means the project's payback is calculated at ₹86 while its costs and revenues will be realised at whatever rate prevails for the next several years - a project that only clears its hurdle at a depreciated rupee is not a viable project.
Hedge the receivable. With $6.0m contracted and a banker explicitly raising a return to ₹83, the prudent step is to book forward cover on the order book, locking a margin close to the ₹5.20 crore base case. Hedging gives up the upside of further depreciation; that is the price of removing a ₹1.2 crore swing from a business whose entire EBIT is ₹5.2 crore.
Read the intervention correctly. Selling dollars to slow the slide absorbs rupees and drains domestic liquidity; central banks typically offset this through liquidity injection, so intervention slows the rupee's path rather than reversing it - but it makes one-way bets on further depreciation unsafe. Plan the capex on a ₹83 base case, treat anything above that as upside, and stress-test the project at ₹80.