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How the Re slide will impact sectors

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Though the first quarter of this financial year has nearly come to an end, analysts and research houses are still trying to figure out the exact impact of on companies. Here’s a list of sectors and how the rupee will impact companies.

Software services
The overall growth in dollar revenue of software companies in rupee terms is expected to be higher due to the 12 per cent fall in the currency. According to Espirito Santo Securities, “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 60-80 per cent 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, Deutsche Bank believes the gains could be limited due to three factors.

WEAK RUPEE PINCHES INDIA INC
Sector  Impact
Telecom Net impact on earnings would be negative due to large exposure to forex debt (Rs 45,000 crore), the bulk of which remains unhedged
Capital goods Since sector is net importer, the impact of the rupee could be negative on earnings. Additional risk would be unhedged forex debt, two-thirds of which is unhedged
Power utilities/
materials
The players have foreign debt to the tune 
of Rs 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
Auto The sector is a big importer. So, those that have not hedged payouts will be hurt by weak rupee when demand is soft. Maruti has hedged exposure for H1FY13
IT services Net earnings of Tier-I firms likely to improve by 50-110 basis points with every one per cent fall in the rupee
Pharma With over 60% of the sector’s revenues from exports, weak rupee to benefit companies with low forex debt and lower hedges
Metals Positive surprise likely, as export revenues are linked to global prices. But the sector has Rs 29,200 crore overseas loan exposure, of which only half is hedged.

First, at least 70 per cent of raw material and 20 per cent of labour cost is generally linked to the dollar. Second, is the price competition among Tier-II pharma companies. And third is the depreciation in other emerging market currencies against the dollar.

Many companies in this sector have foreign currency loans. Analysts 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. Espirito Santo says, “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, and Lupin could see a neutral to marginal benefit to their FY13 EPS.”

Auto
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. According to Sharekhan, 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.

According to analysts, Hero MotoCorp faces the risk of earnings erosion due to the rupee’s fall. After factoring in exports, raw materials account for 14 per cent of net sales, which are imported by vendors in yen-denominated deals. Sharekhan has estimated an EPS impact of 13 per cent, 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. Analysts 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 Rs 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.

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How the Re slide will impact sectors

Though the first quarter of this financial year has nearly come to an end, analysts and research houses are still trying to figure out the exact impact of the rupee on companies. Here’s a list of sectors and how the rupee will impact companies.

Though the first quarter of this financial year has nearly come to an end, analysts and research houses are still trying to figure out the exact impact of on companies. Here’s a list of sectors and how the rupee will impact companies.

Software services
The overall growth in dollar revenue of software companies in rupee terms is expected to be higher due to the 12 per cent fall in the currency. According to Espirito Santo Securities, “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 60-80 per cent 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, Deutsche Bank believes the gains could be limited due to three factors.

WEAK RUPEE PINCHES INDIA INC
Sector  Impact
Telecom Net impact on earnings would be negative due to large exposure to forex debt (Rs 45,000 crore), the bulk of which remains unhedged
Capital goods Since sector is net importer, the impact of the rupee could be negative on earnings. Additional risk would be unhedged forex debt, two-thirds of which is unhedged
Power utilities/
materials
The players have foreign debt to the tune 
of Rs 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
Auto The sector is a big importer. So, those that have not hedged payouts will be hurt by weak rupee when demand is soft. Maruti has hedged exposure for H1FY13
IT services Net earnings of Tier-I firms likely to improve by 50-110 basis points with every one per cent fall in the rupee
Pharma With over 60% of the sector’s revenues from exports, weak rupee to benefit companies with low forex debt and lower hedges
Metals Positive surprise likely, as export revenues are linked to global prices. But the sector has Rs 29,200 crore overseas loan exposure, of which only half is hedged.

First, at least 70 per cent of raw material and 20 per cent of labour cost is generally linked to the dollar. Second, is the price competition among Tier-II pharma companies. And third is the depreciation in other emerging market currencies against the dollar.

Many companies in this sector have foreign currency loans. Analysts 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. Espirito Santo says, “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, and Lupin could see a neutral to marginal benefit to their FY13 EPS.”

Auto
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. According to Sharekhan, 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.

According to analysts, Hero MotoCorp faces the risk of earnings erosion due to the rupee’s fall. After factoring in exports, raw materials account for 14 per cent of net sales, which are imported by vendors in yen-denominated deals. Sharekhan has estimated an EPS impact of 13 per cent, 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. Analysts 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 Rs 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.

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