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Currency value has a close co-relation to corporate earnings. With export income accounting for a third of the CNX Nifty earnings, any upward or downward movement in the currency impacts in a meaningful way. While the rupee has remained largely stable against the dollar in recent times, other currencies have weakened sharply. The euro, for instance, has depreciated 20 per cent against the rupee in the past year. Currency analysts expect the trend to continue in 2015, with the region's economic outlook likely to weaken further. Europe accounts for 17 per cent of India's total exports. So, companies exporting to that region might report a contraction in revenues and earnings.
The euro has fallen against a basket of other currencies as well - not just the rupee. Indian exporters might not be able to increase prices to offset the loss arising from a depreciation of the euro. Given the economic environment, European firms might not be willing to pay a higher price for imports, impacting export volumes.
There are some sectors, which have a much higher exposure to Europe than others. Software services exporters are seeing some stress thanks to cross-currency volatility. Indian vendors derive 31-48 per cent of sales from Europe, which is why revenue and margins might come under pressure over the next few quarters.
The other sectors that have a sizable exposure to Europe include textiles, apparels, auto components, organic chemicals, and iron & steel. As Europe accounts for 45 per cent of India’s total apparel & footwear exports, these two segments are likely to be impacted the most on account of a weaker euro, says Spark Capital.
The currency is a big risk to corporate earnings as India does not have the productivity enhancing tools that can offset such a strong currency in export markets. Ridham Desai, managing director, Morgan Stanley (Research), says the rupee is overvalued by seven per cent and it is a big risk to earnings and growth.
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