How Currency Moves Split Exporters and Importers

A currency move lifts what a company earns abroad and what it pays abroad at the same time, in the same period. Which of the two wins is not settled by calling the company an exporter. The direction is settled by which side of its own accounts carries more rupees, and for plenty of exporters that is the cost side.

Three things already established make the arithmetic below short. Currency appreciation and depreciation showed that one quoted number carries two readings and that one move produces two different percentages. The material on trade showed which parts of a working business sit on the far side of a border. And why a small move in a large number shifts a small number a great deal is already established in this reading sequence. The Republic of Sankhya, an invented country, quotes its rupee against a unit called the Marut, and Nirvi Engineering trades from inside it. Every figure attached to them is stated rather than measured, so each step can be checked against the one before it.

Why does one currency move touch a company twice?

Consider a household. One member drives a taxi. The price of diesel goes up, and a few weeks later the fare board goes up too. Money coming in moved. Money going out moved. Both moved on the same event, and whether the month ends better or worse than the last one depends on how many litres the taxi burns against how many fares it takes. Nobody in that household would answer the question by saying they are in the transport business. The household would count.

Nirvi Engineering is in exactly that position, with a currency in place of diesel. The company sells Rs 300 crore of its Rs 1,000 crore of revenue abroad, priced in Marut units. Against that, it buys Rs 360 crore of imported inputs out of its Rs 900 crore of costs, also priced in Marut units. The Marut unit goes from 80.00 to 84.00, a rise of 5.00 per cent, and every line written in Marut is then converted into more rupees than before. The export receipts become Rs 315 crore, a gain of Rs 15 crore. The landed costWhat an imported item ends up costing once the price abroad, the freight, the duty and the rate at which it was paid are all counted in. of the imported inputs becomes Rs 378 crore, a rise of Rs 18 crore.

A company sits on one side of a currency move only when it has no foreign inputs or no foreign sales, and most working businesses have some of each. Two assumptions are holding still while that happens, and both are stated rather than hidden: the prices in Marut units are unchanged, and so are the quantities sold and bought. Holding both assumptions still is what lets the whole move land on the rate alone. The invoice currencyThe currency a bill is written in, which decides whose accounts a rate move lands in first and who carries it afterwards. on each line decides whether that line moves at all. Relax either assumption and the arithmetic gets longer, but the shape stays as it is.

How does the comparison actually come out for this company?

The subtraction comes next, and it is the step the label never performs. Revenue gains Rs 15 crore. Costs gain Rs 18 crore. Operating profitThe amount a business is left with from trading, after paying the costs of running it and before interest and tax come into the account. was Rs 1,000 crore less Rs 900 crore, or Rs 100 crore. After the move it stands at Rs 1,015 crore less Rs 918 crore, or Rs 97 crore. The move took Rs 3 crore of operating profit out of a business that sells nearly a third of everything it makes to buyers abroad.

Nirvi Engineering sells thirty per cent of its revenue outside Sankhya and a weaker rupee still costs it Rs 3 crore of operating profit. Read that sentence twice. Almost everything written about currencies and companies is written as though it cannot happen. The loss happens whenever the rupee amount on the cost side is larger than the rupee amount on the revenue side, and there is nothing exotic about that arrangement. A business that assembles imported components and ships a share of the finished product abroad will often carry exactly this shape.

Notice what the arithmetic did not need. The subtraction did not need a view on where the rate goes next. Nor did it need the rate to be 84.00 rather than any other number, only the size of the move. And it did not need anything about the company beyond four figures: revenue, costs, the rupees of sales priced abroad and the rupees of inputs priced abroad. Four figures and one move, and the direction falls out.

Why is being an exporter not enough to settle the direction?

Here is the sentence that trips almost everyone, and it is worth slowing down for. Exports are 30.00 per cent of revenue. Imported inputs are 40.00 per cent of costs. The two percentages look as though they can be set beside each other. Each is measured against a different total, so they cannot be. Revenue is Rs 1,000 crore. Costs are Rs 900 crore. Thirty per cent of the larger total is Rs 300 crore. Forty per cent of the smaller total is Rs 360 crore. The share that sounds smaller is the larger amount of money.

The same reasoning is applied correctly in a shop. One shop takes 10 per cent off a Rs 2,000/- kettle and another takes 25 per cent off a Rs 600/- kettle. Nobody walks out with the second one thinking they saved more. The shopper multiplies. A percentage on its own is only half a fact, and the other half is what it was a percentage of. Each percentage is measured against a total of its own, so the rupee amounts decide the direction and the percentages do not.

Comparing shares when the amounts are what matter is where the confident wrong answers cluster. A reader who compares 30.00 against 40.00 gets the right direction here by luck. The larger share also happens to be the larger amount. Reversing the totals while keeping the shares makes the luck run out. Comparing Rs 300 crore against Rs 360 crore instead involves no luck at all: the cost side is Rs 60 crore larger, and every rupee of that Rs 60 crore is exposed to the same move.

Why does the margin fall further than the profit does?

Operating profit went from Rs 100 crore to Rs 97 crore, a fall of 3.00 per cent. Now look at the operating margin. The margin was 10.00 per cent. The new margin is Rs 97 crore over Rs 1,015 crore, and that is 9.56 per cent. The margin fell by 0.44 points, and 0.44 points against a starting 10.00 per cent is a fall of 4.43 per cent in proportion. The profit fell 3.00 per cent and the margin fell 4.43 per cent, from one event, in one period.

The reason sits in the second number of the ratio. The move did not only reduce the top of the fraction. The move also raised the bottom. Rs 15 crore of extra export receipts is extra revenue, so revenue is Rs 1,015 crore rather than Rs 1,000 crore. A smaller top over a bigger bottom falls twice over. Had revenue stayed at Rs 1,000 crore, the new margin would have read 9.70 per cent. Most people give that answer, and it is wrong by 0.14 points because the bottom of the fraction moved as well.

A move that touches revenue changes the bottom of the margin as well as the top, so profit and margin never fall by the same proportion. Profit and margin are therefore worth reporting as two separate numbers. A note that says profit fell 3.00 per cent has stated half of it. A note that says the margin fell 4.43 per cent has stated the other half and sounds worse than the first. Both are correct, they describe the same event, and quoting only one of them is how an honest number becomes a misleading one.

What happens when the same move meets the opposite exposures?

Put a second Sankhya business beside the first. Suvira Instruments has the same revenue of Rs 1,000 crore, the same costs of Rs 900 crore and the same operating profit of Rs 100 crore. Two lines differ, and only two. Its sales priced abroad are Rs 400 crore rather than Rs 300 crore, and its inputs priced abroad are Rs 200 crore rather than Rs 360 crore. Nothing else about it has been changed, and the move applied to it is the identical 5.00 per cent.

The same arithmetic gives the opposite answer. Revenue gains Rs 20 crore and reaches Rs 1,020 crore. Costs gain Rs 10 crore and reach Rs 910 crore. Operating profit goes from Rs 100 crore to Rs 110 crore, a rise of 10.00 per cent. The margin goes from 10.00 per cent to 10.78 per cent, a rise of 7.84 per cent in proportion. The margin rose less than the profit did, for the mirror image of the earlier reason: revenue grew as well, so the bottom of the ratio grew under a bigger top.

Nothing separates the two companies except the two exposure lines, and the sign of the answer changed with them while the currency move stood still. Both companies sell abroad. If the direction came from the label, both would move the same way. The direction comes from the amounts instead, so one company is Rs 3 crore worse off and the other is Rs 10 crore better off on the very same event.

What decides the size of the effect rather than its direction?

Three things, and only three. The first is the gap between the two rupee exposures. Rs 300 crore of sales priced abroad against Rs 360 crore of inputs priced abroad nets to Rs 60 crore sitting on the cost side. The second is the size of the move, 5.00 per cent here. Multiplying the two gives the answer directly: Rs 60 crore at 5.00 per cent is Rs 3 crore, exactly the profit that went missing. The same step for Suvira Instruments takes Rs 200 crore net on the sales side at 5.00 per cent and gives Rs 10 crore gained. The long route and the short route agree because they are the same subtraction in a different order.

The third is the one that is usually missing from a note, and it is whether either side is fixed by contract for a period. If the inputs are bought at a rate agreed months ago, the cost arm does not move this quarter. If the export receipts are contracted, the revenue arm does not move. A contracted rate delays the arrival of a move rather than removing it, and the third item is the one most often left out of an analysis. When the contract runs out the inputs are bought at whatever rate applies then, and what that rate is on that day is not known in advance.

A forward contractAn agreement made now to exchange one currency for another on a set date at a rate fixed today rather than at whatever rate applies then. therefore shows up in this arithmetic as a date rather than as a shield. The contract moves the arrival, changes who carries the move in the meantime, and leaves the underlying exposure exactly where it was. A business that renews its contracts every quarter has the same exposure as one that does not, arriving one quarter later and in steps.

How does a lender or an analyst actually read this?

The useful skill here is knowing which question gets the answer. A lender sizing a working capitalThe money tied up in running a business day to day, in stock and in amounts owed by buyers, less what the business itself still owes suppliers. limit for Nirvi Engineering does not ask whether it is an exporter. The answer to that question does not move a single number in the file. The lender asks for two amounts and a date: how many rupees of sales are priced abroad, how many rupees of inputs are priced abroad, and as of when. With those, a stated move of any size gives a change in profit in one multiplication, and the lender can see whether the cover on the loan holds at moves the borrower has actually lived through.

An analyst writing the same business up has a second duty on top of that: to set the move and the exposures down alongside the answer. A line saying profit falls Rs 3 crore is not checkable by anybody. A line saying that Rs 60 crore of net exposure on the cost side at a move of 5.00 per cent gives Rs 3 crore of profit is checkable by everybody, including the analyst six months later who no longer remembers which move was assumed. Ask how many rupees of sales and how many rupees of inputs sit on the far side of a border. The label the company uses for itself is not an input to the arithmetic.

A household does the same arithmetic without naming it. Somebody paying a fee abroad for a child studying overseas is paid entirely in rupees at home, so all of the exposure sits on one side and none on the other, and the direction for that household really is settled by the label. The household is the special case, not the general one. A working business almost never has that shape. Counting beats classifying for exactly that reason, and a hedgeA step taken to reduce how much a price or a rate move can change a number somebody cares about, usually by fixing that price or rate in advance. on one arm only changes which arm is left standing in the open.