Description
The document about International Financial Management taking the example of Tirupur which is the textile hub of India.
Tirupur:
International Financial Management
Executive Summary
Tirupur is the largest exporter of textile in India, it exports around 90% of Indian cotton knitwear. T The exporters of cotton knitwear are governed by Tirupur Exporters Association (TEA). They invoice around 70% of their clients in USD. During 2007-08 it suffered huge economic losses as dollar depreciated against the rupee and their risk was not hedged. To add to this the inflation of 7 percent increased the raw material cost, fuel cost, etc. All this made the production cost higher by 24% in Tirupur than other countries competing with India. This enabled Bangladesh to quote prices that was 17% lower than what exporters from Tirupur had quotes, thus majority of orders went to Bangladesh. Along with this they made considerable losses by taking speculating positions in derivative market. In future to hedge its risk against fluctuating dollar prices, it should take necessary measures. As 50% of its export is to European countries, it is advisable that they invoice all the European clients in Euro since it is quite stable against INR. At the same time they should buy derivative products like futures in both USD and Euro. The government should also be supportive to the exporters of Tirupur, it should have policies favorable to the exporters.
Introduction
Tirupur City is located on the banks of Noyyal River and is popularly known as the textile city1. It has a total population of 11 lakhs including the suburban areas. It is also known as knitwear capital of the country and is the leading source of sportswear, casual wear, knitted garments, hosiery. The textile business provides an employment for around 5 lakh people. This was possible mainly due to favorable climate which provide abundant raw material. Also, the availability of workforce has enabled it to maintain it status of knitwear capital of the country for past three decades. The exporters of cotton knitwear are governed by Tirupur Exporters Association (TEA) 2, which was established in the year 1990. It has registered a consistent growth of 36% for every year since 1988. As of now it accounts for 90% of India’s cotton knitwear exports. Earlier there was a fixed quota for each exporting country, assured by buyers from US and Europe. After removal of the quota system the competition is based on who give it at minimum
price. Over the last couple of years, Indian currency has appreciated more than other Asian competitors like Bangladesh, Pakistan and China. During 2007-08 the dollar depreciated sharply by 12% with respect to rupee, thus making India’s export more expensive than other countries. Many of India clients are now shifting to other countries like Bangladesh, China and Pakistan. The total export fell by about 10% due to dollar depreciation. During the year 2006-07, TEA could earn revenue of Rs 11,000 crore which dropped to Rs 9,950 crore due to dollar depreciation. If we analyze the distribution of exports of TEA across different continents than 30% is exported to the US and around 50% is exported to countries in European Union3. Whereas, around 70% of TEA’s clients are billed in US dollars.
Causes for concern
The main reason for depreciation of US dollar against Indian rupees is due to the large inflows of USD in the form of FII and FDI investment. Along with this the increase in export from India further put more pressure of USD. This resulted in depreciation of USD by 12.3% against INR during the year 20074. Thus, the un-hedged Indian exporters were getting lesser revenue for the same volume of export.
USD-INR Exchange Rate
46 45 44 43 42 41 40 39 38 37 36
In INR
Figure 1: USD-INR Exchange Rate from Jan 2007 to Jan 2008
To add to this the inflation in textile industry touched a high of 7%. This meant that the raw materials were getting costlier whereas the price for the final product was getting reduced (in terms of rupees). During the same period the Union government had increased the minimum support price for medium staple cotton to Rs 2500 per quintal, from Rs 1800-1850 last year5. The government also reduced duty drawback on cotton knitted garments from 11% to 8%, this duty drawbacks enable the exporters to gain refund of custom duty. Along with this the government also withdrew a subsidy of 2% interest on export credit. All this made the production cost higher by 24% in Tirupur than other countries competing with India. For example, Bangladesh could quote prices which were 17 percent lower than what Indian exporters quoted, thereby securing larger export orders. As around 50% was exported to European countries but around 70% of total export was billed in USD. This meant that many of the European clients were billed in USD. The below graphs shows the movement of USD against Euro, it can be clearly seen from the graph6 that USD was depreciating with respect to Euro. Due to this the European clients were paying lesser Euro for the same amount of goods imported from Tirupur. This meant that they were happier paying in USD for their import and insisted the invoicing to be done in USD.
Exchange Rate USD-EURO
0.8 0.78 0.76 0.74 0.72 0.7 0.68 0.66 0.64 0.62
USD-EURO
Figure 2: USD-Euro Exchange Rate from Jan 2007 to Jan 2008
The private banks tried to convince the exporters in Tirupur that along with earning profits by exporting goods, they could also earn profits by trading in the forex market through derivative products7. The banks send their well trained salesmen to convince simple-minded exporters. The exporters fell to the trap of the banks and bought many derivative products. They assumed that it will fetch them good profits at the same time will compensate them of the export losses due to dollar depreciation. It fetched some profits in the initial days but as the dollar fell further during 2007 they accumulated huge losses to the tune of Rs 500 crores only through derivatives. The private banks did not explain the drawbacks of the derivative products. The other problem faced by TEA during 2007-08 was the uncertainty in availability of raw materials like cotton, yarn, etc. There was a regular mismatch between demand and supply of these raw materials with frequent fluctuations in their prices. Due to inflation the fuel prices had shot up and the duties and taxes on petroleum products were higher especially in Tirupur. At the same time the government at that time put pressure on the processing units to put up an effluent treatment plant to reduce the pollution.
Suggestions
The below graph shows the exchange rate of Euro to INR, it can be observed from the graph that during 2007-08 the Euro-INR movement was very stable. Thus, the exporters would have been better off by invoicing in Euro rather than USD. As around 50% of TEA’s export is to the European countries but only 30% is invoiced in currencies other than USD. It is advisable that TEA bill export to European countries in Euro rather than USD. This is also beneficial to the European countries as the movement of Euro-INR is quiet stable and they will be able to better predict their cash outflow.
Exchange Rate EURO-INR
65 63 61 59 57 55 53 51 49 47 45
Since almost all of TEA revenue is from export operations. It is better to hedge its risk against currency fluctuations. If it goes for invoicing of European clients in Euro and if it continues billing US clients in USD then the exporters will have to hedge their risk against fluctuations in both currencies. In Indian context currency futures of both Euro and USD are available. Hence, ideally TEA can hedge its risk in both currencies. The main problem in TEA using derivative products is that they might not have required knowledge of the products. To add to it they are comprise small and medium enterprises thus they will have to buy this derivative products through the banks with whom they have credit relationships. The main aim of TEA using derivative product should be to hedge its risk if rupee appreciates against USD or Euro. To hedge this risk the exporters of TEA can buy put contract to sell USD or Euro if it falls below Rs 43 or Rs 58 respectively. The downside risk will be hedged whereas if the rupee depreciates against USD and Euro the exporters will be better off gaining extra rupees. To support the exporters of TEA the government should take right measures so that they don’t pay higher taxes. The government should also ensure that undue restriction due to pollution
EURO-INR
Figure 3: Euro-INR Exchange Rate from Jan 2007 to Jan 2008
should not be imposed on them, to make this happen TEA should also take measures from its side to reduce the pollution.
References
1) http://en.wikipedia.org/wiki/Tirupur 2) http://www.tea-india.org/portal/pages/aboutus.aspx 3) http://livemint.com/2008/04/10233651/High-cotton-price-inflation-a.html 4) http://finance.intomobile.com/about/?Month=2&Page=HISTORICAL&Ticker=USD-
INR&Year=2007&Range=12
5) http://news.alibaba.com/article/detail/fabric/100006007-1-costs%252C-competition-hit-
tirupur-textile.html
6) http://www.oanda.com/currency/historical-
rates?date_fmt=us&date=01/01/08&date1=01/01/07&exch=USD&expr=EUR&format=C SV&margin_fixed=0
7) http://www.thehindubusinessline.com/2008/07/04/stories/2008070450490800.htm
doc_982130328.docx
The document about International Financial Management taking the example of Tirupur which is the textile hub of India.
Tirupur:
International Financial Management
Executive Summary
Tirupur is the largest exporter of textile in India, it exports around 90% of Indian cotton knitwear. T The exporters of cotton knitwear are governed by Tirupur Exporters Association (TEA). They invoice around 70% of their clients in USD. During 2007-08 it suffered huge economic losses as dollar depreciated against the rupee and their risk was not hedged. To add to this the inflation of 7 percent increased the raw material cost, fuel cost, etc. All this made the production cost higher by 24% in Tirupur than other countries competing with India. This enabled Bangladesh to quote prices that was 17% lower than what exporters from Tirupur had quotes, thus majority of orders went to Bangladesh. Along with this they made considerable losses by taking speculating positions in derivative market. In future to hedge its risk against fluctuating dollar prices, it should take necessary measures. As 50% of its export is to European countries, it is advisable that they invoice all the European clients in Euro since it is quite stable against INR. At the same time they should buy derivative products like futures in both USD and Euro. The government should also be supportive to the exporters of Tirupur, it should have policies favorable to the exporters.
Introduction
Tirupur City is located on the banks of Noyyal River and is popularly known as the textile city1. It has a total population of 11 lakhs including the suburban areas. It is also known as knitwear capital of the country and is the leading source of sportswear, casual wear, knitted garments, hosiery. The textile business provides an employment for around 5 lakh people. This was possible mainly due to favorable climate which provide abundant raw material. Also, the availability of workforce has enabled it to maintain it status of knitwear capital of the country for past three decades. The exporters of cotton knitwear are governed by Tirupur Exporters Association (TEA) 2, which was established in the year 1990. It has registered a consistent growth of 36% for every year since 1988. As of now it accounts for 90% of India’s cotton knitwear exports. Earlier there was a fixed quota for each exporting country, assured by buyers from US and Europe. After removal of the quota system the competition is based on who give it at minimum
price. Over the last couple of years, Indian currency has appreciated more than other Asian competitors like Bangladesh, Pakistan and China. During 2007-08 the dollar depreciated sharply by 12% with respect to rupee, thus making India’s export more expensive than other countries. Many of India clients are now shifting to other countries like Bangladesh, China and Pakistan. The total export fell by about 10% due to dollar depreciation. During the year 2006-07, TEA could earn revenue of Rs 11,000 crore which dropped to Rs 9,950 crore due to dollar depreciation. If we analyze the distribution of exports of TEA across different continents than 30% is exported to the US and around 50% is exported to countries in European Union3. Whereas, around 70% of TEA’s clients are billed in US dollars.
Causes for concern
The main reason for depreciation of US dollar against Indian rupees is due to the large inflows of USD in the form of FII and FDI investment. Along with this the increase in export from India further put more pressure of USD. This resulted in depreciation of USD by 12.3% against INR during the year 20074. Thus, the un-hedged Indian exporters were getting lesser revenue for the same volume of export.
USD-INR Exchange Rate
46 45 44 43 42 41 40 39 38 37 36
In INR
Figure 1: USD-INR Exchange Rate from Jan 2007 to Jan 2008
To add to this the inflation in textile industry touched a high of 7%. This meant that the raw materials were getting costlier whereas the price for the final product was getting reduced (in terms of rupees). During the same period the Union government had increased the minimum support price for medium staple cotton to Rs 2500 per quintal, from Rs 1800-1850 last year5. The government also reduced duty drawback on cotton knitted garments from 11% to 8%, this duty drawbacks enable the exporters to gain refund of custom duty. Along with this the government also withdrew a subsidy of 2% interest on export credit. All this made the production cost higher by 24% in Tirupur than other countries competing with India. For example, Bangladesh could quote prices which were 17 percent lower than what Indian exporters quoted, thereby securing larger export orders. As around 50% was exported to European countries but around 70% of total export was billed in USD. This meant that many of the European clients were billed in USD. The below graphs shows the movement of USD against Euro, it can be clearly seen from the graph6 that USD was depreciating with respect to Euro. Due to this the European clients were paying lesser Euro for the same amount of goods imported from Tirupur. This meant that they were happier paying in USD for their import and insisted the invoicing to be done in USD.
Exchange Rate USD-EURO
0.8 0.78 0.76 0.74 0.72 0.7 0.68 0.66 0.64 0.62
USD-EURO
Figure 2: USD-Euro Exchange Rate from Jan 2007 to Jan 2008
The private banks tried to convince the exporters in Tirupur that along with earning profits by exporting goods, they could also earn profits by trading in the forex market through derivative products7. The banks send their well trained salesmen to convince simple-minded exporters. The exporters fell to the trap of the banks and bought many derivative products. They assumed that it will fetch them good profits at the same time will compensate them of the export losses due to dollar depreciation. It fetched some profits in the initial days but as the dollar fell further during 2007 they accumulated huge losses to the tune of Rs 500 crores only through derivatives. The private banks did not explain the drawbacks of the derivative products. The other problem faced by TEA during 2007-08 was the uncertainty in availability of raw materials like cotton, yarn, etc. There was a regular mismatch between demand and supply of these raw materials with frequent fluctuations in their prices. Due to inflation the fuel prices had shot up and the duties and taxes on petroleum products were higher especially in Tirupur. At the same time the government at that time put pressure on the processing units to put up an effluent treatment plant to reduce the pollution.
Suggestions
The below graph shows the exchange rate of Euro to INR, it can be observed from the graph that during 2007-08 the Euro-INR movement was very stable. Thus, the exporters would have been better off by invoicing in Euro rather than USD. As around 50% of TEA’s export is to the European countries but only 30% is invoiced in currencies other than USD. It is advisable that TEA bill export to European countries in Euro rather than USD. This is also beneficial to the European countries as the movement of Euro-INR is quiet stable and they will be able to better predict their cash outflow.
Exchange Rate EURO-INR
65 63 61 59 57 55 53 51 49 47 45
Since almost all of TEA revenue is from export operations. It is better to hedge its risk against currency fluctuations. If it goes for invoicing of European clients in Euro and if it continues billing US clients in USD then the exporters will have to hedge their risk against fluctuations in both currencies. In Indian context currency futures of both Euro and USD are available. Hence, ideally TEA can hedge its risk in both currencies. The main problem in TEA using derivative products is that they might not have required knowledge of the products. To add to it they are comprise small and medium enterprises thus they will have to buy this derivative products through the banks with whom they have credit relationships. The main aim of TEA using derivative product should be to hedge its risk if rupee appreciates against USD or Euro. To hedge this risk the exporters of TEA can buy put contract to sell USD or Euro if it falls below Rs 43 or Rs 58 respectively. The downside risk will be hedged whereas if the rupee depreciates against USD and Euro the exporters will be better off gaining extra rupees. To support the exporters of TEA the government should take right measures so that they don’t pay higher taxes. The government should also ensure that undue restriction due to pollution
EURO-INR
Figure 3: Euro-INR Exchange Rate from Jan 2007 to Jan 2008
should not be imposed on them, to make this happen TEA should also take measures from its side to reduce the pollution.
References
1) http://en.wikipedia.org/wiki/Tirupur 2) http://www.tea-india.org/portal/pages/aboutus.aspx 3) http://livemint.com/2008/04/10233651/High-cotton-price-inflation-a.html 4) http://finance.intomobile.com/about/?Month=2&Page=HISTORICAL&Ticker=USD-
INR&Year=2007&Range=12
5) http://news.alibaba.com/article/detail/fabric/100006007-1-costs%252C-competition-hit-
tirupur-textile.html
6) http://www.oanda.com/currency/historical-
rates?date_fmt=us&date=01/01/08&date1=01/01/07&exch=USD&expr=EUR&format=C SV&margin_fixed=0
7) http://www.thehindubusinessline.com/2008/07/04/stories/2008070450490800.htm
doc_982130328.docx