The steady decline in the Indian rupee, which hit an all-time low of 70.40 against the dollar last week, is expected to be a big bonanza for export-oriented businesses. Indian information technology (IT) and pharmaceutical firms, and select auto ancillary units, which earn a large part of their revenues in dollars, are likely to see their margins rise.
According to financial services firm Nomura, currency depreciation is a tailwind for margins and could provide some relief to exporters struggling with slow goods and services tax (GST) refunds and tighter trade finance.
Analysts say firms in the IT sector having a large exposure to the US would benefit the most as a majority of their revenues are earned in US dollars, while for pharma firms, it is beneficial as exports account for more than 50% of revenues.
Arun Thukral, managing director and chief executive officer, Axis Securities, said one should watch out for debt levels in the US currency, as a large debt exposure could reduce forex gains for these firms. The benefit of a weak rupee will depend on hedging strategies of these firms as well, he added.
“Ebitda (earnings before interest, taxes, depreciation and amortization) margins and revenue of IT and pharma companies will get a boost depending on the net of foreign debt exposure, hedged portion and how the rupee moves further from here. The debt exposure will increase interest payments. If exporters have kept themselves hedged, then it would take some time before their margins gain due to rupee weakening and also the way rupee further weakens or strengthens would be the deciding factors.”
Thukral feels if rupee sustains at this level or falls further, the bottom line of IT and pharma firms will improve, leading to an increase in their earnings per share (EPS).
Madhu Babu, research analyst, Institutional Equities at Prabhudas Lilladher Pvt. Ltd, also agrees the rupee breaching 70 against the dollar is likely to create fresh optimism for Indian IT firms as the average rate for FY18 was 64.5 and in Q1FY19 it was 67.5 per dollar. “Hence, continued fall in rupee is likely to be a tailwind for margin assumptions. Ceteris paribas (Latin for other things being equal), a 1% rupee depreciation could aid Ebidta margins by 30 basis points and EPS estimates by 1.7%,” he added.
One basis point is one-hundredth of a percentage point.
Babu said that relatively cheaper price to earnings (PE) stocks might give higher alpha in this sentiment-led rally (HCL Technologies Ltd trading at 12.8 times FY20 EPS, while TCS and Infosys Ltd at 23 and 18 times, respectively, FY20E EPS are relatively trading at higher valuations).
However, he was quick to add that in reality, IT firms may not benefit from rupee’s deprecation in long-term though immediate quarters may see some bump-up in margins.
“While US dollar versus rupee fell from 45 in FY11 to 65 in FY18 over 7 years, margins for Indian IT vendors have actually dropped in this phase. We note 40-55% of revenues are now derived from fixed price projects. If rupee remains at these levels, (USD vs INR at 70, which is a 10% drop year-on-year from FY18), vendors will start taking the new rate when going for bidding for new deals and, hence, cut US dollar pricing," Babu said.
IT and pharma sectors, which have struggled for various reasons, and seen analysts cut their earnings estimates in 2017, may see good revenue addition as most of the concerns seem to be behind.
Cyndrella Carvalho, deputy vice-president, pharmaceuticals, Kotak Securities, said: “Pharma firms are looking positive, considering the worst is behind in terms of compliance status improved with most industry key players. Green shoots in terms of earnings visible in US base business stabilized, with single-digit price erosion and well supported by strong domestic business outlook and also good growth from emerging markets will aid growth.”
Carvalho thinks rupee depreciation will aid EPS upgrade of around 3-4% on an average for pharma companies.
Both the BSE IT and BSE Healthcare indices had underperformed benchmarks last year.
In 2017, BSE IT was up 10.8% and BSE Healthcare was up 0.48% against a jump of 27.9% of BSE Sensex. In the year so far, BSE IT and BSE Healthcare indices gained 33.18% and 1.4% while BSE Sensex rose 11.4%.
The Indian currency sank to record lows on the back of a strengthening dollar and a crash in the lira, after Turkey’s widening diplomatic spat with the US.
Rupee is the weakest amongst Asian peers, losing nearly 9% this year so far.
A weak rupee could, however, spell trouble for import dependent sectors, including oil marketing companies, global commodities like metals and mostly for the domestic economy.
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