Tirupur Is Caught In A Conundrum

Textile town Tirupur is caught in a conundrum: It is not enough for the town’s famed textile units to merely excel in hosiery, but it also has to bring that same class into the manner in which it manages international currency. And that, the textile town is learning, is easier said than done. Some exporters who thought that forward contracts would help protect them from currency fluctuations are learning that forward contracts, too, can cut both ways. Tirupur had been chanting the euro mantra of late in the face of rupee appreciation against the dollar, but it has suffered a fresh trade setback with the euro rising to Rs 62.9 from the previous level of Rs 58 to a euro.

Most of the exporters dealing with European buyers and doing business in euro have been unable to reap the benefits of an appreciating euro.

The unexpected rise has apparently left garment exporters of the region in a quandary as they had entered into forward contracts for Rs 59 to a euro about a month back. Under a forward contract, banks provide exporters the amount fixed in the contract irrespective of the market fluctuation. If an exporter wishes to come out of the contract, he has to pay the difference between the present rate and the rate at which he entered into contract. Hence, most of the exporters dealing with European buyers and doing business in euro have been unable to reap the benefits of an appreciating euro.

A banker who encouraged his clients to opt for forward contract to save themselves from currency fluctuation termed it as a notional loss, adding that it was hoped that the strengthening of the euro may not continue for long. “During the same period last year, we bore the brunt of the rising rupee and suffered losses for not opting for forward contract when the euro fell to Rs 55. This year we are facing the prospect of losses again,” an exporter said. Following a sharp depreciation of the dollar against all major currencies globally, exporters who have businesses in Europe had shifted from invoicing in the dollar to the euro.

Bitten by the appreciating rupee, knitwear exporters of Tirupur started trading in euro as it was considered less volatile and managed to improve their business to some extent. Says Kuppu Dhandapani, chief financial officer of the KPR Mills: “We did persuade our buyers to pay us in euros and were able to incur only minimal losses. Yes, we were happy for a while. But now that euro has also appreciated we are baffled as to how to tackle the problem”. KPR posted a turnover of Rs 158 crore for the third quarter ended December 31, 2007, with euro earnings accounting for 30% of its total business. Hitherto heavily dependent on the US market, most of the exporters had shifted their focus to European markets and succeeded to some extent in getting new clients for kids wear and ladies intimate wears.

In these segments, too, they now face tough competition from their Bangladeshi counterparts who enjoy a price edge, as their goods get a duty exemption in European countries because of the country’s poor economic status. “Though we have managed to get new clients in Europe, the future looks very uncertain,” laments R. Rajkumar, managing director of Best Group, manufacturers and exporters of innerwear and baby wear with a turnover of Rs 3.2 billion. The major exporting houses that have big euro contracts in their kitty have even resorted to cost-cutting exercises by trimming middle-management staff and suspending night shifts. That is no surprise, considering that one third of the Rs 11,000 crore exports from Tirupur are conducted in euro.

02.04.2008.

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