Rupee Slide And Impact Of A Weak Currency On Select Sectors

MUMBAI: For India Inc, the rupee's slide comes as another blow at a time revenue growth is slowing and margins are being squeezed. The currency has lost 11% since May. This will adversely impact capital-intensive sectors and firms with foreign borrowings and those who import raw materials heavily.



Automobiles, capital goods, petroleum, power and telecom companies will bear the brunt of a weak rupee. But, sectors such as software services and pharma, with major export revenues, will benefit, though the extent of gains at the net profit level will hinge greatly on their foreign exchange hedging policies.



The ET Intelligence Group analysed the impact of a weak currency on select sectors.



Pharma:



Most companies in the sector will gain from the rupee's fall, since a substantial proportion of their revenues comes from exports. A strong US dollar and yen will boost net sales and operating margins.



Gainers:



The major gainers will be Dr Reddy's Lab, Sun Pharma, Lupin, Glenmark, Wockhardt and Cadilla Healthcare as they derive significant earnings from overseas markets. Analysts reckon that with every Rs 1 movement, the earning per share of these companies will change by 1-2%. For Cipla, which focuses mostly on the domestic market, rupee's fall could be largely neutral. Aurobindo Pharma and Jubilant Lifescience may not gain much since they have huge foreign borrowings of up to $600 million (about Rs 3,600 crore).



Software:



The operating margins of software service exporters tend to go up by 30-35 bps when the rupee falls by 1% against the US dollar. What may limit the positive impact of a weak rupee on margins will be the strategy the companies adopt to pass on the benefits to clients. Besides, the amount of foreign exchange hedging and the rate at which receivables are sold in the currency forward market will also impact net profit.



Gainers:



Front-end companies, such as TCS, Infosys, Wipro, and HCL Tech, may report improved performance in rupee terms for the quarter to June. However, the impact on net profits will be determined by the extent of hedging losses.



Rupee slide and impact of a weak currency on select sectors



Telecom



Major telcos, including Bharti AirtelBSE 1.28 %, Idea CellularBSE -0.07 % and Reliance CommunicationsBSE 1.56 % (RCom), have substantial foreign currency debt on their books. The sharp fall in the rupee in a short span against major hard currencies will expose these debt positions.



The impact on Bharti will be partially offset by its overseas revenue from the African region. But, the company's net loss will get wider. Its debt-related currency exposure is limited to borrowings of over $500 million (about Rs 3,000 crore) contracted in India, of which 50% is hedged.



For Idea and RCom, external borrowings are 60-70% of their corresponding total debt. Idea has hedged over half of this exposure, while the impact on RCom will be partially offset by revenue from its overseas subsidiary Globalcom.



Automobiles



The automobile industry, which is a generous importer of auto components, could be hit because of a fall in the rupee not only against the US dollar but also against other global currencies, including the yen, euro and pound.



The stress will be reflected in the financials of companies such as Maruti SuzukiBSE 0.14 %, which has a sizeable exposure to the Japanese currency, and also on Tata MotorsBSE -0.47 % to the extent of foreign currency borrowings the company may have on its books.



Other unlisted automobile companies, which rely heavily on imported components for their products, will also be hurt and may have to raise prices despite the severe slowdown in the Indian auto industry.



Gainers:



Bajaj AutoBSE 0.58 %, with a decent exposure to the export market, will benefit because of the rupee's fall.

Source:-economictimes.indiatimes.com