The rupee effect

The fall in the value of Indian rupee against the US dollar means good times ahead for export-oriented companies, while increasing worries for importers.

The recent decline in the value of the rupee reminds us of the fact that there are two sides of a coin.

While the recent slide in the rupee's value against the dollar has been exceptional and has become a cause of worry for many. It has also turned out to be good news for companies that are net exporters of goods and services.

The fall in the rupee is primarily being attributed to the high crude oil prices, which touched all-time high of over $135 per barrel on May 22, 2008.

India imports 73 per cent of its crude oil requirements, thus raising concerns over its widening trade deficit""the difference between the value of goods and services exported and imported by a country. The trade deficit, which is already estimated to be about 10 per cent of the GDP, will further worsen with the rising crude oil prices as oil importing companies will have to buy a higher amount of dollars to meet their needs.

According to estimates, a $10 per barrel rise in crude oil prices may lead to the trade deficit moving up by about $6.5-7 billion or 7 per cent. That apart, the rising crude oil prices also have a cascading effect on the already soaring inflation (which recently crossed the 8 per cent mark) in the country, and thus, result in a weaker currency.

Besides, experts say that there are other factors as well, that have affected the rupee. "A part of this depreciation in the rupee can be attributed to the fact that over the last five months dollar inflow in terms of FII money and FDI has remained muted," says Amitabh Chakraborty, president (equity), Religare Securities.

Since the beginning of 2008, the FIIs have been net sellers to the tune of Rs 13,201 crore in the Indian equity markets, a part of which they might have converted to dollars and withdrawn from the country.

Though the depreciation in the rupee has been a recent phenomenon, currency experts expect the pressure on the rupee to continue for some more time.

"Over the short-run, there can be pressure on the Indian rupee due to uncertainties regarding global crude oil prices, heavy demand for US dollar from our oil majors and subdued capital flows," says Siddhartha Sanyal, economist, Edelweiss Securities.

Experts also predict the rupee to trade between the Rs 43-44 levels for a dollar (now at around Rs 42.59), over the next three to six months. However, this trend could get reversed (perhaps in the medium- to-long run), if crude oil prices decline and foreign investments improve.

The other factor that could provide support to the rupee in the longer term is the relatively strong fundamentals of the Indian economy. And not to forget, the Reserve Bank of India's (RBI) intervention and easing of external commercial borrowing (ECB) restrictions may change the course of currency.

For export-oriented companies, which were feeling the pain of the appreciating rupee just a few months ago, this reads like good news.

IT IS BACK?

Technology has been among the most sensitive sectors, having a close relation with the rupee-dollar movement. Hence, the recent decline in the rupee's value is good news for companies; information technology companies' top lines should move higher as they earn more rupees for every dollar they earn.

"Infosys and Satyam have assumed a rate of about Rs 40 to a US dollar for their FY09 guidance. Thus, if the rupee was to sustain at the current levels of 42 against the dollar or so for some time, it would undoubtedly boost their earnings," says Hitesh Agrawal, head of research, Angel Broking.

Agrawal also estimates that the recent depreciation in the rupee of over 7 per cent may add to about 220-240 basis points gain in the operating margins of IT companies.

However, proactive hedging would partially offset the benefits. HCL Tech is considered to be the most hedged, with $2.7 billion of hedge position covering more than a year's net receivables, whereas Infosys is the least hedged, with a hedged position of $750 million covering 0.8 times it's next two quarters' net receivables.

Also, analysts say Infosys, Satyam and TCS are likely to benefit the most due to higher exposure to options.

Infosys Technologies
With its least exposure to forex hedging, Infosys will be among the major beneficiaries. The company earns more than 85 per cent of its revenues in dollar, while most of its expenses are in rupees.

India Infoline says that at Rs 42.05 to the dollar, Infosys' EPS should rise by 8.7 per cent, which is now pegged at Rs 104 per share for the FY09 against the Rs 96 per share assumed at a rupee rate of 40 for a dollar. At current market price of Rs 1,957, the stock is trading 20 times its FY09 estimated earnings and 17 times FY10 estimated earnings, and is a good bet.

PHARMA: REMEDY TO GROW

The decline in the value of rupee will be good news for pharmaceutical companies exporting to the US.

"Ranbaxy and Sun Pharmaceutical would be the key beneficiaries, as US accounts for about 26 per cent of their consolidated sales. Also, one per cent rupee depreciation increases the net profit by around 2-3 per cent for these companies," says Hitesh Agrawal.

Ranbaxy Laboratories
Ranbaxy generates about 80 per cent of its revenues from overseas markets including 26 per cent from the US. Though the company does not generate all its export revenues in dollars due to its diversified presence across geographies, US accounts for the highest revenues from a region and is also a key market for future.

Ranbaxy is using the twin strategy of alliances and acquisition and a robust product pipeline to expand its business and grow its revenues. Ranbaxy recently tied up with Astra Zeneca in a five-year deal, which is expected to bring in revenues of Rs 5,000 crore starting 2009.

The company's management has said that it is open to settling patent infringement cases on its first-to-file (FTF) portfolio of drugs. This low risk strategy not only helps the company save on legal costs but also ensures revenue visibility. The company's 14.7 per cent stake acquisition in Orchid Chemicals gives its access to manufacturing facilities, which can be used to tide over its own production shortfalls.

In the new product pipeline, the company believes that it has FTF status on 19 Para IV ANDA filings, with an innovator market size of $27 billion. It expects to market one FTF every year for the next five years and reap the rewards from the six month exclusivity benefit. At current market price of Rs 528, the stock is trading at 29 times its estimated FY09 earnings and 17 times its estimated FY10 earnings. 

FOREX EXPOSURE
Rs crore Company	Year End	Net revenue earnings	Net  forex earnings	Net rev earnings (% of sales)	Net forex earnings (% of sales)
Patni Computer	200612	913.03	884.32	91.50	88.62
NIIT Tech.	200703	260.23	257.24	87.57	86.57
Firstsource Solution	200703	378.20	364.63	87.41	84.27
Aban Offshore	200703	429.60	415.82	86.73	83.95
Sasken Comm	200703	286.49	271.79	78.21	74.20
HCL Technologies	200706	2812.51	2761.67	74.63	73.28
MphasiS Ltd	200703	767.94	706.20	69.63	64.03
I-Flex Solutions	200703	1031.12	1021.96	66.42	65.83
Dr Reddy's	200703	2410.95	2342.32	60.92	59.19
Hotel Leela	200703	236.63	208.38	60.11	52.93
Sesa Goa	200703	1127.88	1113.72	55.73	55.03
TCS	200803	10313.26	10081.71	55.65	54.40
Asian Hotels	200703	228.22	215.25	55.15	52.02
Mastek	200706	267.87	264.21	53.77	53.03
Great Offshore	200703	279.23	279.23	51.97	51.97
Infosys Technologies	200803	7998.00	7702.00	51.11	49.22
ICI (India)	200703	-172.56	-173.10	-17.73	-17.79
S A I L	200703	-6097.95	-6209.65	-17.89	-18.22
Bilcare	200703	-64.98	-64.98	-20.12	-20.12
B P C L	200703	-23579.07	-23736.77	-24.42	-24.58
H P C L	200703	-22697.92	-22903.72	-25.30	-25.53
Indian Oil	200703	-91485.60	-91593.09	-42.27	-42.32
Zuari Industries	200703	-1050.69	-1051.17	-43.83	-43.85
Coromandel Fert.	200703	-1255.30	-1257.03	-59.91	-59.99
Note: Net revenue earnings is forex revenue receipts minus expenses

HOTELS: MORE ROOM

The hotel industry, which had earlier converted a part of its billing in rupee denomination to reduce losses on account of the increase in value of the rupee, is expected to enjoy good days on account of the fall in the rupee's value vs the dollar.

However, the benefit to companies will be limited to the extent of their revenues earned in dollars. Analysts expect these companies to gradually shift towards dollar billing if rupee continues to depreciate.

Indian Hotels
Indian Hotels will benefit from the rupee depreciation as well as positive outlook on the sector and its ongoing expansion. For the year ended March 2007, the company earned over Rs 696 crore of revenues in foreign currency, which was over 45 per cent of its revenues.

Indian Hotels is a dominant player in the luxury and premium business travel space having presence across tier-1 and tier-2 cities, as well as 16 hotels outside the country. It is expected to do well on account of higher room demand, and high average room rates and occupancy rates.

As on December 31, 2007, it commanded an average tariff rate of Rs 12,279, which is higher by 15 per cent as compared to December 2006. The occupancy rate remained robust at 76 per cent.

The company is currently having about 10,000 rooms, which it is planning to expand by another 9,000 rooms by FY11 at a cost of Rs 2,500 crore. At the current market price of Rs 110, the stock is trading at 16 times and 12 times its estimated earnings for FY09 and FY10 respectively.

CRUDE GAINS: ABAN OFFSHORE
Most of Aban's rigs are contracted in US dollar terms. With operating margins at about 70 per cent, the gains directly flow to the bottom line.

"In FY09, if the exchange rate stays at Rs 43 against Rs 40 in our previous estimates, Aban's EPS could increase by Rs 50," says Amar Ambani, vice-president - research, India Infoline. Besides, the company will also be a key beneficiary of high crude oil prices galloping over $135 per barrel.

Aban Offshore with its 22 rigs (post acquisition of Norway-based Sinvest) is well poised to leverage the improving industry dynamics. Globally, the demand for rigs is growing on account of the increasing investments in the oil and gas exploration and production space. Also, the lack of availability of rigs are keeping the day rates firm, thus benefiting companies like Aban Offshore.

This is also reflected in its recent contract with ONGC for the deployment of a drillship, Aban Ice, on a three-year contract worth Rs 657 crore, at day rates of around $154,000 against the earlier day rates of $43,000.

The better demand outlook coupled with firm pricing and depreciating rupee makes Aban Offshore as a good investment. At the current market price of Rs 4,000, the stock is trading at about 9 times its estimated FY09 earnings and 7 times its estimated FY10 earnings.

STRONG STEEL: SESA GOA
Exports account for more than 90 per cent of Sesa Goa's revenues. Any depreciation of the rupee against the dollar would undoubtedly lead to higher realisations for the company, as contract negotiations are done in terms of US dollar. A fall in the rupee will also lead to a rise in the company's profit.

According to estimates, on the base case assuming the rupee-dollar rate at 40, the profits for the FY09 works Kout to about Rs 222.1 crore.

However, it will be higher by over six per cent if the rupee-dollar rate remains at about 42.50. Besides, the company will also benefit on account of higher demand for the iron ore (primary input used to manufacture steel) and better pricing outlook in the international market.

At Rs 4,286, the stock is currently trading at reasonable valuations of 7.6 times its estimated FY09 earnings and 5.7 times its estimated FY10 earnings.

Rupee woes

While the depreciation in the rupee is positive for some companies, there is bad news for companies dependent on imports. And things could get worse for companies that are net importers of commodities such as oil, derivatives of oil, inputs for steel manufacturing and coal, since their prices have shot up.

Crude oil importers such as Indian Oil, HPCL and BPCL may feel more heat due to the rupee depreciation and rising crude oil prices, if they are not able to pass it on to consumers or if they are not compensated by the government for selling fuel at subsidised rates.

Also, steel companies importing coking coal may also see margins come under pressure as coking coal prices in the international market have gone up from about $90 per tonne to about $300 per tonne in the last year.

A similar impact of the depreciating rupee will be on the companies that have aggressively borrowed in dollar loans (and are not hedged fully) but without commensurate receivables (revenues) in dollar terms.