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How the depreciating rupee value will impact sectors in India

June 25, 2012

Software services:
The overall growth in dollar revenue of software companies in rupee terms is expected to be higher due to the 12%  fall in the currency. Decline in business optimism and company specific performances should ideally drive earnings downgrades and de-rating, but in the near term we expect INR led EPS upgrades for most technology companies. HCL Tech has the highest sensitivity to the rupee and Tech Mahindra the lowest.

Pharma:
Like IT companies, almost 60 to 80% of the revenues of pharma companies come from exports and a large part of the value addition happens in India.
So, a weak rupee would typically benefit the sector. However, the gains could be limited due to three factors.

  1. at least 70% of raw material and 20% of labour cost is generally linked to the dollar.
  2. is the price competition among Tier-II pharma companies.
  3. is the depreciation in other emerging market currencies against the dollar. Many companies in this sector have foreign currency loans. 

I believe many firms tend to hedge their net exposure over varying timeframes. Thus, the positive impact of a weak currency could be partial offset by hedges, as well as potential mark-to-market losses on forex liabilities. Ranbaxy has the biggest sensitivity to forex fluctuations. The INR depreciation is likely to be negative for Dr Reddy’s due to high amount of cash flow hedges, while Cadila, Cipla and Lupin could see a neutral to marginal benefit to their FY13 EPS.

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This sector is dependent on imports and the sliding rupee would increase costs. With demand staying soft, rising costs cannot be entirely passed on. Those deriving a substantial portion of their earnings from exports would benefit. For the first half of FY13, India’s biggest car maker, Maruti Suzuki, has hedged its forex liabilities. The company has hedged its rupee-yen exposure for the first half of FY2013 and hence, the impact would be felt in the second half of FY2013. I believe Hero Moto-Corp faces the risk of earnings erosion due to the rupee’s fall. After factoring in exports, raw materials account for 14% of net sales, which are imported by vendors in yen-denominated deals. I estimate approximate  an EPS impact of 13% , if the rupee stays at these levels.

Metals and Mining:

While the Street continues to have a negative view on metals as a sector, the impact of the weak rupee is relatively positive for these companies.
I expect an upside surprise as export revenues are linked to international prices. Also, domestic prices are based on import-parity basis. Therefore, realisations would be better. However, a big overhang could the  be 29,200-crore foreign currency loan exposure of companies in this sector. Only half of this exposure is hedged. Though steel makers would benefit from import parity pricing, a fall in raw material costs would be offset by the rupee’s fall.

Telecom:

Net impact on earnings would be negative due to large exposure to forex debt(~45,000 crore), the bulk of which remains un hedged.


Capital goods:

Since sector is net importer, the impact of the rupee could be negative on earnings. Additional risk would be un hedged forex debt,
two-thirds of which is un hedged

Power utilities

The players have foreign debt to the tune
materials of 21,000 and high import content FMCG Marginal benefit  in terms of export revenues. Most are net cash companies and have little balance sheet risk

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