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The Street is betting on export-oriented sectors to gain the most in the aftermath of the yuan depreciation which saw the rupee lose two per cent against the dollar this week.
With gains of three to four per cent each, pharmaceuticals and information technology (IT) indices were the biggest gainers, while every other index ended in the red. Given the losses sustained by other emerging market (EM) currencies and the fact that India’s exports have contracted for a seventh month in a row, analysts expect the Indian currency to fall more.
Ajay Bodke, chief portfolio manager (PMS), Prabhudas Lilladher, believes on an inflation-adjusted basis the rupee appears overvalued and far from competitive. Given the current fall and expectations of more, analysts are betting on IT and pharma. Given their inherent strengths and defensive nature, these sectors are on the Street’s buy list.
In addition, select companies from other sectors such as gems and jewellery, chemicals/dyes, leather, automobiles and auto ancillaries are also expected to gain from a weaker rupee.
In the pharma space, larger generic players (Lupin, Sun Pharma) with a significant exposure to the US market will stand to gain the most. What will add to the gains for the segment in general are cheaper input costs, such as bulk drugs sourced from China. Says Sarabjit Kour Nangra, vice-president, research, Angel Broking, “The pharma space could benefit due to cheaper imports from China and rupee depreciation, with most larger pharma companies getting about half their revenue from the US market.”
While pharma companies are net exporters, some such as Glenmark and Dr Reddy’s have a significant presence in EMs and the two companies bore the brunt of currency fluctuations in the June quarter. While this is a worry, Nangra believes a large part of the weakness in those currencies has played out.
Automobile and auto component companies, especially those with a larger proportion of revenue from exports, will also gain from a weak rupee. Bajaj Auto, Bharat Forge, Balakrishna Industries and Cummins, which get 25-50 per cent of revenue from export, are expected to benefit. However, most of these export to non-US markets (except Bharat Forge), where the local currencies have also depreciated, nullifying some of the gains. Given the weak domestic market, a geographically diversified one hedges their revenue risk.
A weaker yuan could make imports cheaper and, so, boost domestic demand. A domestic fund manager says China will export deflation across the world, making domestic goods cheaper, boosting demand for products like inverters, air-conditioners and mobiles in India. While currency hedges taken by companies will play a role, the fund manager expects companies in the textiles and gems & jewellery sectors to become uncompetitive (at the margin, not structurally), as the yuan has fallen more than the rupee as compared to the dollar.
However, some old-economy sectors could benefit. Some are chemicals & dyes and leather, though there are few options in the listed space.
Not all analysts, however, agree there will be much to gain from rupee depreciation. G Chokkalingam, founder, Equinomics Research & Advisory, says global slowdown is negating any effect of currency depreciation. What will make a difference is quality of products and a higher productivity and demand scenario. Gains from rupee depreciation will be short-term in nature.
Which is true. Ultimately, a strong business model and inherent competitive advantages will count. Notably, many companies (including those in the table) have a proven track record, having weathered several ups and downs, which investors could pick from.
