How A Weaker Rupee Will Impact India Inc.
As the rupee remains below the 70 mark to a dollar, having weakened the most among Asian peers so far this year, analysts said it’s expected to boost earnings for software exporters and pharmaceutical companies and hurt sectors with high dollar-denominated debt.
A 1 percent depreciation in the rupee will result in a 0.3 percent increase in Nifty 50 earnings, according to Elara Capital. Reliance Industries Ltd. and Infosys Ltd., with their dollar-driven revenue, will be among the biggest positive contributors to Nifty earnings, the brokerage said, adding that a weak Indian unit will hurt import-driven firms like the nation’s largest carmaker Maruti Suzuki Ltd. and oil refiners and marketers Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd.
The rupee has depreciated nearly 10 percent this year while Nifty 50, India’s equity benchmark, gained 10 percent. That means foreign investors made no returns in dollar terms on their investments. Overseas investors have withdrawn nearly Rs 39,000 crore so far this year, with most the outflows contributed by debt.
They, however, turned buyers in July after three straight months of selloff, and inflows improved in August. Yet, according to UBS, the depreciation bias on the Indian currency will remain. That could lead to increased financial market volatility, more so when global crude oil prices remain elevated.
The brokerage expects the Indian unit to remain in the 68-72 range against the dollar because of a widening basic balance deficit, debt outflow and pre-election uncertainty.
Kaushik Das, chief economist of Deutsche Bank, agreed. Negative aspects of the rupee depreciation are greater compared to any likely benefit for exporters or other stakeholders, according to Das. If the rupee continues to depreciate, Das said there’s a risk that the pace of foreign outflows from debt may accelerate, leading to further pressure on the currency.
The rupee fall is still not as steep as in 2013 when the Indian currency weakened 22 percent in four months in May-August as the U.S. Federal Reserve indicated that it would start winding down its easy-money policy implemented after the 2008-09 credit crisis.
That’s why Capital Economics isn’t too concerned. The recent depreciation has been much more gradual than the sudden and sharp drop five years ago, according to Shilan Shah, senior India economist at Capital Economics. “The slide this time resembles more closely that in early 2016, when the rupee last reached a similar level without major financial stress.”
Reiterating that the currency fundamentals imply that the direction of the rupee may be weak in the near term, Mahesh Nadurkar, India strategist at CLSA, said information technology exporters and pharmaceuticals would be the obvious beneficiaries. Metals should benefit but that would be offset by forex debt and trade war issues, he said.
Net importers like Maruti Suzuki India Ltd., Asian Paints Ltd. and Kansai Nerolac Paints Ltd. would be negatively impacted, CLSA said in a note. So will be companies with forex debt, including Adani Power Ltd., Rural Electrification Corporation Ltd., Power Finance Corporation Ltd., Bharti Airtel Ltd., Tata Power Ltd. and Adani Ports Ltd., it said.
For Elara Capital, Chennai Petroleum Ltd. and TVS Motor Ltd. will be the top beneficiaries while Tata Motors Ltd. and CEAT Ltd. will be the top losers from the rupee depreciation.
Information technology sector is one of the primary beneficiaries of rupee depreciation because of its large dollar-denominated revenues. A 1 percent deprecation in the India currency against the dollar will improve margins by 20-25 basis points, according to data compiled by BloombergQuint.
But that will only help the companies with unhedged dollar income component. Software services exporters usually hedge 60-80 percent of overseas sales for up to one to two quarters.
Export-driven drugmakers stand to gain from the falling rupee. Divis Lab Ltd. will benefit as exports to the U.S. contribute a substantial part of its sales but the company doesn’t hedge against forex volatility. That will aid its profits.
- Aurobindo Pharma Ltd. and Biocon Ltd.’s currency hedges will restrict the full gain of a weaker rupee.
- Indian generic makers like Sun Pharmaceutical Ltd., Dr Reddy’s Ltd., Lupin Ltd. and Cadila Health Ltd. etc. too tend to benefit but the benefit is limited due to higher percentage of domestic sales.
- For multinational drugmakers, a weaker rupee is a negative because of imports getting expensive.
Airlines face a direct impact of the rupee depreciation as 65-70 percent of their expenses are dollar-denominated. For the first half of the calendar year, Interglobe Aviation Ltd., the operator of IndiGo, reported a forex loss of Rs 339 crore while SpiceJet reported a currency loss of Rs 67 crore. Jet Airways Ltd., which has yet to report its first-quarter results, had reported a forex loss of Rs 132 core in the quarter ended March.
Oil & Gas
Costs for oil marketers rise with a weaker rupee as they buy the key material — crude — in dollars. In the first half of 2018, all the three oil marketing companies reported foreign exchange losses. They at times pass on the costs, limiting the impact.
For oil and gas explorers, a weaker rupee is a positive as their sales are dollar-denominated.
For Paintmakers, crude and and its derivative titanium account for around 50 percent of raw material costs. So a weaker rupee makes them costlier, hurting their gross margins.
Some of the metal makers stand to gain as domestic prices depend on import parity and higher realisations from exports. State-run National Aluminium Company Ltd. Hindustan Copper Ltd., whose costs are linked to the rupee, stand to gain more. Dollar debt will hurt companies such Hindalco Industries Ltd., Tata Steel Ltd. and Vedenta Ltd.
- Costs for cementmakers can go up marginally as imported coke and diesel prices will rise with a weaker rupee.
- India Cements Ltd. with dollar debt on its books will be negatively impacted.
- Content distributors like Dish TV Ltd. and Hathway Cable Ltd. as costs of set-top boxes are dollar denominated.
- Among automakers, Bajaj Auto benefits as its margins and realisation will improve since exports contribute 40 percent to its sales.
- A weaker rupee increases crude and fuel prices, hurting auto demand. Auto companies pass on the costs to customers via price hikes—that should impact demand and sentiment.
(The impact of a weaker rupee on companies and sectors has been compiled from company filings and reports by brokerages like Elara Capital, CLSA and UBS)