IT, pharma, textile, auto ancillary sectors stand to gain from a weak rupee

The pump prices of diesel and petrol and the price of gas cylinders hitting new highs is guaranteed to contribute to high inflation. Apart from high taxes, this is because the global price of crude and gas has risen 50 per cent in the past six months and India imports 85 per cent of its crude and about 50 per cent of its gas.

This places the government in a difficult position. Petro products are one of the few items that can bring in tax revenues during a recession. The states and Centre combined collected Rs 6.7 trillion in taxes on fuels last fiscal, which kept public finances afloat.

The impact of higher energy prices is always net-negative due to import dependency. Apart from domestic inflation, it leads to a trade deficit causing downwards pressure on the rupee. However, it does mean that export-oriented businesses can make some gains. Partly because their revenues are higher in rupee terms and partly because goods and services become more competitive.

The rupee tested the Rs 75.5/ USD resistance levels in April and strengthened till Rs 72.25 in late May/ early June. It is now back at above Rs 74.5 / USD and if it breaks the Rs 75.5 barrier, it could spike quite a lot further. The Indian crude basket has risen in price from $71.7/ barrel in April to $78.85 in June. If the current oil prices are sustained, or there is a further rise in the price, there will be sustained pressure on the rupee. This could be balanced to some extent if there are high inflows due to net FII buying but the rupee is more likely to head down than up.

There are a few sectors, which could see potential gains. One is obviously IT. We may see upside surprises beating estimates across the sector if the rupee stays weak. Another sector is pharmaceuticals. In both cases, the market expectations are highly optimistic. The indices of the IT and pharma industries have outperformed the Nifty in the recent past. Both sectors would be considered momentum plays where traders expect outperformance to continue.

A third area is textiles. The textiles sector saw a recovery in Q4FY21 and a weaker rupee could make it more competitive, and boost exports. In Q4, a sample of 122 listed textile companies registered an aggregated YoY rise of 27 per cent in revenues to Rs 58,044 crore, coupled to 104 per cent rise in PBDIT to Rs 11,412 crore and 123 per cent rise in PAT to Rs 4,139 crore. The textiles performance has been much more mixed in terms of share performance. Investors would have to carefully select the companies which are likely to gain on the export front.

A fourth area of selective investment is auto-ancillaries. Quite a few component manufacturers hold significant export market share. Roughly one-third of industry revenues come from exports and this could rise. The Auto Component Manufacturers Association projects CAGR of close to 40 per cent for exports over the next five years. A weaker rupee could be a driver for this optimistic projection.