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Wednesday, July 06 2022

Dollar is on Escalator and Rupee in Ventilator…!!! - 10 min read

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The rupee has hit its all time low of Rs.64.13 per dollar. The comman- man is worried about this but as per international experts this is not a concern. Its quoted as “the cycle” in the economy. So let us check who are the people benefitted from the rupee depreciation.

The falling rupee has been a matter of worry for many. There has been a whopping hike in the prices of the grocery and perishable goods and you can not ignore the increase in the prices of petroleum products. The petroleum companies have shifted their burden to the common man and he has shifted his anger on to the government.

Rupee fall will benefit IT profit margins

Bangalore: The sharp fall in the rupee value against the dollar , if it sustains, will have a salutary impact on the profit margins of Indian IT companies. This will be particularly welcome for IT companies now when margins have been under pressure because of weaker demand . Since IT companies earn most of their revenues in dollars , given that their big market is the US, and since their expenditures are mostly in rupees, given that they do their delivery mostly out of India, profit margins will widen in line with the rupee depreciation.

Pankaj Kapoor of Standard Chartered Securities India, said different companies had different margin sensitivity. “For Infosys , every 1% change in rupee value leads to an increase or decrease in EBIT margins by 50 basis points. For TCS, it is 30 bps,” he said. Since May 1, the rupee has depreciated by over 6%. Kapoor says the margin effect may not be visible much in the current quarter (since a good part of the quarter is over), but there may be a sharp improvement in the second quarter if the rupee remains at least at these levels.

Dipen Shah, head of private client group research in Kotak Securities, noted that IT stocks gained on Friday even though the broader market ended lower. “The IT stocks gained largely due to the depreciating rupee. A 5% depreciation will have a 125-150 bps impact with other things constant,” he said. He also noted that since IT companies might suffer hedging losses that might partially offset the beneficial impact of the rupee fall. Daljeet Kohli, head of research in brokerage firm IndiaNivesh Securities , also said that the final impact would depend on each company’s hedging strategy.

How will Reliance Ind.  benefit from rupee depreciation?

Reliance Industries Ltd (RIL) will receive benefits from an upward revision in natural gas prices from 2014, but the company is likely to have started seeing windfall gains from sharp depreciation of the rupee.

The Mukesh Ambani-led company earns 60 per cent of its overall revenue from exports, so any fall in the rupee value translates into higher realization in rupee terms.

In 2012-13, RIL earned $44.1 billion in export revenue. Since March 31, the Indian rupee has slid 10.2 per cent against the US dollar. Consequently, RIL’s export realization in rupee terms would have risen by a commensurate amount. At the current exchange rate of 59.8 a dollar, this would, theoretically, translate into an additional revenue of Rs 24,492 crore.

Two likely hiccups

However, two factors may reduce the net benefit to Reliance Industries from the rupee’s moves. One, with most of its Rs 68,000 crore of borrowings denominated in foreign currency, Reliance may have to shell out higher interest as well as principal repayments with depreciation in the Rupee. Given that the composition of debt is not known, it is unclear how much of the above realizations will be offset by this.

And two, the company does lock into specific exchange rates for its export revenues by way of hedging contracts. Based on what levels the company is locked into, its actual realizations may be lower than that estimated above.

With respect to RIL’s natural gas business, a price of $8.4 a million British thermal units from next fiscal, will lift the valuation by 10 per cent after adjusting for increased Government share, according to a JM Financial report. Its petrochemicals business is projected to similarly benefit.

Brokerages have revised Reliance Industries’ earnings estimates for 2013-14 upwards by 3-5 per cent on these developments.

Have you heard of companies by the name of Avanti Feeds and Waterbase? Or better still, did you buy their shares in August 2011? If yes, you made good gains in a period the market was on a downward spiral.

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Between August 1, 2011, and December 30, 2011, the Sensex slid 15.6% to 15,455. However, Avanti Feeds and Waterbase shares rose 215% from Rs 39 to Rs 123 and 88% from Rs 8 to Rs 15, respectively.

So, what do these companies do and what made their stocks tick? Well, both are from the aquaculture sector, and being export-oriented gained from the depreciation of the rupee.

“Export-oriented sectors benefit from rupee depreciation. These include software services, pharmaceutical and aquaculture. However, there will be limited gains for engineering goods and gems and jewellery sectors as they import raw materials,” says Anand Tandon, CEO, JRG Securities.

“Information Technology (IT) and pharmaceutical companies will benefit as they are export-focused,” says David Pezarkar, head, equities, Daiwa Asset Management.

When rupee depreciates, exporters get more for each dollar of sale proceeds. It fell 21% to 53.26 per dollar between August 1, 2011, and December 30, 2011. Market experts say it may fall further.

“The rupee is the worst performer among emerging market currencies. It is likely to test the 55 level,” says Shrikant Chouhan, head, technical research, Kotak Securities.

“While the rupee is expected to remain under pressure in the short term, it is likely to move in a narrow range before strengthening in the later half of the year as economic growth improves,” says Daiwa’s Pezarkar.

While exporters gain from rupee depreciation, a strengthening rupee benefits companies that rely on imports. We analyse what it means for the different sectors.


The IT sector earns around $60 billion a year from export of software and services. From August 16, 2011, to December 31, 2011, the Bombay Stock Exchange (BSE) IT index outpaced the Sensex. The Sensex fell 7% to 15,455 but the IT index surged over 13% to 5,752.

“A falling rupee increases the margins of export-oriented sectors. The progress in the next six months will depend on the rupee. If it slides towards 60, as is widely believed, the IT index may rise another 10-15%” says Kishor P Ostwal, chairman and managing director, CNI Research.

FII inflows during last six months of 2011
Amar Ambani, head of research, IIFL, is also upbeat. “Despite concerns in Europe and the US, the demand held up, as seen in second quarter results, especially for the Tier-1 players. Rupee depreciation is expected to help earnings.”

Infosys, Wipro and Tata Consultancy Services rose 16% to Rs 2,765, 17% to Rs 399 and 19% to Rs 1,161, respectively, between August 16, 2011, and December 30, 2011.

A PINC Research report says the business environment remains uncertain. Also, there will be pressures of lower IT spending and dollar revenue growth in 2012-13. Volume growth for Tier-I IT companies is likely to be 12-15%. However, a weakening rupee would limit the impact, it said.

Experts are positive on heavyweights. Prabhudas Lilladher says Infosys, Wipro and TCS can test Rs 3,090, Rs 410 and Rs 1,230 levels, respectively, in the next couple of months. On January 16, 2012, they were trading at Rs 2,634, Rs 407 and Rs 1,107, respectively.

Pharmaceutical: The size of the Indian pharmaceutical industry is $20 billion, or Rs 1 lakh crore, with exports accounting for $9 billion, or Rs 45,000 crore. Many domestic companies such as Lupin, Sun Pharmaceutical and Dr Reddy’s Laboratories have high exposure to the west.

“A depreciating rupee has a mixed impact on the sector. Highly export-oriented companies gain. If the rupee falls further, Divis Laboratories, Glenmark Pharmaceuticals and Dr Reddy’s Laboratories can rise,” says Sudip Bandhyopadhyay, managing director and CEO, Destimoney Securities.

Some differ. Gargi Deb, research analyst, Microsec Capital, says, “The rupee depreciation may not benefit export-driven pharmaceutical companies which have taken forward covers to hedge the currency risk. Cipla and IPCA Laboratories have some unhedged positions and so may marginally gain from the rupee depreciation.”

“The BSE Healthcare index fell due to foreign exchange losses suffered by the companies. Otherwise, the sector is doing well. But if the market continues to fall along with the rupee, there may be a profit-taking round in their stocks,” says Kotak’s Chouhan.

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Between August 19, 2011, and December 30, 2011, Lupin, Sun Pharmaceutical and Dr Reddy’s shares rose 2.7% to Rs 447, 6.3% to Rs 496 and 12% to Rs1,577, respectively, as the rupee fell 20%. The BSE Healthcare index rose 35.45 points, or 0.60%, to 5,870 .

Aquaculture: India exported 3.13 lakh tonnes marine products worth Rs 6,679 crore, or $1.4 billion, in April-September 2011. Compared to this period a year ago, there was 0.12% growth in volume, 19.91% in rupee earnings and 23.01% in dollar earnings. This shows that the weakening rupee helped Indian seafood exporters. During the first nine months of financial year 2011-12, Avanti Feeds and Waterbase surged 240% to Rs 123 and 269% to Rs 15.85, respectively.

Avanti Feeds manufactures shrimp feed. During the quarter ended September 30, 2011, it registered a 524% rise in net profit. Frozen shrimp continued to be a major export, accounting for 58.41% earnings in dollar terms. Shrimp exports rose 19.34% in quantity, 32.90% in rupee and 36.74% in dollar terms.

Waterbase operates a fishery. It registered a profit of Rs 2 crore in the quarter ended September 30, 2011, as against a loss of Rs 63 lakh in the same quarter last year.

“Floods in Thailand helped these companies. They have a high export thrust, so a weakening rupee is an advantage for them,” says Alex Mathews, research head, Geojit Paribas Financial Services. He is bullish on the sector for the medium term due to the possibility of further weakening of the rupee.

BUMPY RIDE for Importers

Market experts say companies that are net importers are likely to be hit. Those that have unhedged external borrowings may also face the heat. For example, oil marketing companies (OMCs) now have to pay more rupees to buy crude oil in the international market. They suffer further because they don’t have the freedom to increase retail prices.

“Companies which import substantial inputs will have to sacrifice margins,” says Pezarkar of Daiwa Asset Management.

Capital Goods: The capital goods sector was under a lot of pressure in 2011 with the result that the BSE capital goods index fell 47% to 8,068 between January 2011 and December 2011. There has been a marked slowdown in order inflows, and with interest rates rising, projects are either being postponed or shelved.

Milan Bavishi, head research, Inventure Growth and Securities, says, “The sharp rupee fall has made the situation worse. A weakening rupee has a direct impact on manufacturing companies for two reasons. First, Indian companies are net importers. Second, they have loans and claims to international banks and will either have to pay more to settle the loans or refinance the debt with high-cost local loans.”

Rikish Parikh, vice president equities, Motilal Oswal Financial Services, seconds Bavishi. “A weakening rupee would have partially affected the sector as companies in India depend on technical knowhow from abroad. Also, although prices of metals on the London Metal Exchange have fallen, the companies here have not benefited because of the weakening rupee.”

Oil Marketing Companies: Share prices of oil marketing companies (OMC) declined 45-50% between September 2011 and December 2011 as margins contracted due to higher input costs. The recent rupee depreciation has added to the woes of Indian Oil Corporation (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL). For instance, the IOC stock fell 45% from Rs 456 in September 2010 to Rs 247 in December 2011. HPCL fell 55% and BPCL 45%.

OMCs are struggling due to large under-recoveries in diesel, kerosene and LPG as they have to sell these fuels at subsidised prices.

“The companies have urged the government to offset losses and are taking steps to cut cost and improve productivity. The additional cost of importing crude oil due to weakening rupee without a corresponding increase in retail prices has put a strain on them,” says Rakesh Goel, head, marketing and distribution, Bonanza Portfolio.

Market experts say the fall in crude oil prices from $115 to $104 per barrel in recent months has partially offset the impact of the weakening rupee. But they also express uncertainity about the stability of the rupee due to mixed market trends in the international market.

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