Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Rupee appreciation: Hits and misses - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 7, 2004

    Rupee appreciation: Hits and misses

    After depreciating by 6.2% between April 2nd 2004 to August 6th 2004, the Rupee has appreciated by as much as 5.7% since then. While most attribute this appreciation to the greenback's weakness as opposed to Rupee's strength, one cannot ignore the fact that it has implications on the stock market and profitability for India Inc.

    Without getting into the complexities of why the Dollar is tumbling, we take a closer look at the top importers and exporters of the country and what is the magnitude of impact? The data is of FY04 from the Quantum Universe of 350 companies. All figures are as a percentage to sales, on a standalone basis. We have divided the export dependent sectors into three sets i.e. software, pharmaceuticals and companies from other sectors.

    The exporters lobby (% sales - FY04)
    Software Pharma Other sectors
    Satyam Computers 90.2 Wockhardt 36.6 Nalco 55.3
    Hughes Software 94.3 Cipla 44.1 United Phosphorus 57.3
    Geometric Software 95.1 Lupin 47.3 Satnam Overseas 57.6
    Infosys 95.2 Aurobindo 51.0 Ashapura Minechem 58.6
    i-flex 95.3 JB Chemicals 51.8 EIH 58.6
    Mastek 95.9 Dr. Reddys 58.9 Hotel Leelaventure 66.5
    Digital 98.2 Biocon 59.8 Sesa Goa 69.7
    Patni Computers 99.6 Ranbaxy 62.4 Welspun India 74.3
    Mphasis BFL 99.6 Orchid Chemicals 76.6 Himatsinka Seide 92.5
    VisualSoft 100.0 Divis 85.4 Suraj Diamonds 92.8

    Given the fact that software exports (including ITES) accounted for an estimated 17.9% of the country's exports in FY04, it is not surprising to see that the contribution of exports to revenues of technology companies are higher. But there is one crucial factor, which investors need to consider. While the Rupee has appreciated against the Dollar, the rupee has actually depreciated against the Euro for the period between August 6th, 2004 to December 1st, 2004.

    What is therefore important to consider here is the contribution of US to total revenues of software companies, which are dollar denominated. Based on our estimate of the top three software services companies in India viz. Infosys, Wipro and TCS, US accounted for 59.8% of combined revenues in FY04. Therefore, the recent Rupee appreciation will have a negative impact on the software sector. The magnitude of impact is likely to differ between companies. Our interaction with five of the software services companies suggest that the companies have hedged themselves against the Dollar for the next twelve months and to that extent, the impact is mitigated. The new contracts that are likely to be signed from here on will factor in this rupee appreciation and to that extent, there will be a negative impact. Having said that, considering the strong move towards offshoring in the global markets, higher growth in revenues could partially negate the Rupee appreciation.

    Moving away from software companies, domestic pharma majors are also highly dependent on exports viz. US, Europe, South America and SAARC countries. Of the consolidated revenues of Ranbaxy, 43% was accounted by the US markets in FY04. In the case of Dr. Reddy's, the contribution stood at lower at 28% in FY04. While companies like Biocon, Nicholas Piramal and Wockhardt do not have significant US contribution as of now, going forward, this is likely to increase and to that extent, margins may be affected. Besides pharma majors, other sectors from the list that are highly dependent on exports are hotels (Hotel Leelaventure and EIH) and Nalco. On a conservative basis, dollar denominated revenues account for atleast 60% of room revenues of hotel companies. While the removal of the quota regime is a positive for the textile sector, if rupee continues to trade firm or appreciate, it may not be that profitable. In this context, expectations need to be realistic.

    The importers lobby (% sales - FY04)
    Energy & petrochem Other sectors
    HPCL 18.1 Mercator Lines 56.9
    Gulf Oil 18.9 Welspun Gujarat 60.0
    Southern Petrochem 22.1 Apar Industries 60.5
    Flex Industries 24.3 D-Link India 63.8
    IOC 31.0 Sterlite Industries 66.7
    Finolex 36.0 Zuari Industries 68.6
    Chennai Petro 60.7 Suraj Diamonds 75.1
    Kochi Refineries 62.4 Moser Baer 76.1
    Reliance 65.2 STC India 78.9
    MRPL 67.0 Godavari Fertilisers 86.3

    The key beneficiaries from the Rupee appreciation are importers, as the Dollar is now worth less for every rupee or to put it in different terms, less rupee can buy more dollar denominated assets/commodities/goods. Among the importers, companies from energy dependent sectors are likely to benefit in a significant manner (energy, paints and few textile majors). Companies that source raw materials from the global markets and are largely domestic demand driven could potentially witness margin improvement. Besides companies, rupee appreciation is also a positive for the government's financials and capital goods sector (most of the equipments are imported, as the country is technology deficient).

    To conclude, as India's trade with global markets increase (this includes imports, exports, FII inflow and FDI inflow), the impact of exchange rate movements cannot be underestimated. At times, adverse exchange rate movements could affect money flow into the country. Since exchange rate movement is not only dependent on what is happening in India but also in the US and other economies, the complexity increases dramatically.

    Without trying to be 'doomsayers', investors need to take a balanced view on factors like exchange rate, interest rate trend in the US and so on, before jumping onto the hot 'India story'.



    Equitymaster requests your view! Post a comment on "Rupee appreciation: Hits and misses". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

    Aug 23, 2017

    Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

    Deep State First (Vivek Kaul's Diary)

    Aug 23, 2017

    Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 (Close)