Rupee weakness weighs down FMCG stocks, but shot in arm for IT pack

The IT sector, which has the second-highest weightage in the Sensex after the financial sector, has been a key contributor to the 10% gain for the benchmark this year

The recent plunge in the rupee has taken the fizz out of consumption stocks, which are known to trade at premium valuations.

Some reasons for high valuations, according to analysts, are easy global liquidity, stable currencies, and high earnings growth in local currency terms. However, the recent developments have reversed all these trends, triggering a sharp re-rating in shares of fast moving consumer goods (FMCG) firms.

Between April and August, the BSE FMCG index rose 25 per cent, outperforming the 16 per cent returns by the benchmark Sensex. So far in September, the index has lost more than 6 per cent amid a slide in the rupee. Shares of Hindustan Unilever (HUL), the leader of the pack, have eroded 10 per cent from their peak. So have shares of Britannia and Nestle India.

The Indian currency has depreciated 13 per cent against the greenback this year, with the fall intensifying over the last two months.

“The market perhaps ignored the link between inflation, currency and cost of equity — assuming a stable currency. The earnings of many consumer staple and discretionary stocks have not been that impressive in dollar terms over the past few years,” said a note by Kotak Institutional Equities.

While weakness in the rupee has weighted down the FMCG sector, it has been a shot in the arm for the information technology (IT) pack. The BSE IT index, a gauge of technology stocks, has risen 40 per cent this year — making it one of the best-performing sectoral indices this year. The IT index has gained 8 per cent since August. The Kotak Institutional report, however, warns that for re-rating in IT stocks to sustain, there has to be continuous and steady depreciation in the rupee.

“The recent steep re-rating of IT stocks, on the back of a sharp decline in the rupee, may hold only if the market believes in a steady 2-3 per cent depreciation per annum of the rupee for a long time, as was the case in the 1990s when 3-5 per cent per annum depreciation in the rupee was the norm and duly factored in analysts’ models,” the note says.

The IT sector, which has the second-highest weightage in the Sensex after the financial sector, has been a key contributor to the 10 per cent gain for the benchmark this year.

India’s largest IT firm TCS has gained 55 per cent this year, while peer Infosys has climbed 43.4 per cent. The rally in mid-cap IT shares has been much sharper, with Tech Mahindra and Mindtree gaining 68.4 per cent and 89.2 per cent this year, respectively.