MUMBAI: A stronger rupee can help check inflation as it will pull down commodity prices, but export-reliant companies such as IT firms and drug makers are likely to take up to 4% hit on their earnings, industry insiders say.
The rupee has gained 5.6% against the US dollar since the beginning of the year, strengthening significantly after the Reserve Bank of India (RBI) changed its policy stance on credit cost.
This is impacting companies that import less and export more including vehicle manufacturers, textile companies and metals firms, some of which are already looking to focus more on domestic market as the government seems comfortable with a stronger rupee.
"'That (the rupee appreciation) is something we need to watch out for... I think we want to keep in mind the trajectory of the rupee and see how we navigate," said MD Ranganath, chief financial officer at InfosysBSE 0.96 % Technologies, the country's second-largest software exporter.
India's exports contribute 18% to India's gross domestic product (GDP). Out of the $435 billion exports, software exports contributes roughly $100 billion.
"With nearly 50% of the Nifty earnings per share linked to global economy through exports, global subsidiaries or commodity prices, a stronger rupee could knock off 4% of their growth in the financial year 2018,'' Prateek Parekh, analyst at Edelweiss, wrote in a report last week.
Experts attribute the rupee's appreciation to weaker intervention by RBI amidst strong portfolio inflows, excess liquidity in the banking system, and the government's stance.
Experts attribute the rupee's appreciation to weaker intervention by RBI amidst strong portfolio inflows, excess liquidity in the banking system, and the government's stance.
On Wednesday even as stock benchmarks Sensex and Nifty rose to record high, BSE indices on export-intensive sectors such as energy, healthcare, IT, and oil and gas ended in the negative.
Analysts expect the rising rupee to make it harder for IT companies to pivot their businesses because investments in newer technologies will crimp their already narrowing margins.
"Recent sharp INR strength is also beginning to emerge as an irritant and needs to be monitored especially in the context of traditional margin levers having limited force going forward," Manik Taneja, an analyst at Emkay Global, said in a note.
Some automobile makers have chosen to have a mix of both local sales and exports to weather the hit from a stronger rupee.
"From the foreign exchange point of view, if you have a mix of domestic and exports it is kind of a quasi-hedging strategy as well,'' said Anurag Mehrotra, executive director for marketing, sales & service at Ford India.
''Export is a key part of our growth strategy without a doubt because it sits within the effective scale pillar that we have," he said. Steel makers, a worried lot after India turned net exporter, will now focus more on selling in the local market.
"Earnings will be down to the extent of rupee appreciation," said Vikram Amin, executive director (strategy & business development) at Essar SteelBSE 0.41 %. "But exports will be steady going forward... Our first priority is to cater to the domestic market and exports are generally value-driven," he said.
India's steel exports jumped 102% in 2016-17 to 8.24 million tonne from 4.07 million tonne in 2015-16 with Tata Steel, Steel Authority of IndiaBSE -0.66 % (SAIL) and JSW SteelBSE -1.13 % reporting three-fold rise in export volumes during the year, utilising capacities that may have remained idle had they relied largely on domestic demand.
Textile and apparel exporters' earnings and EBITDA margins will be impacted in the near term due to rupee appreciation and weak demand from traditional markets such as the US and UK, India Ratings and Research in a report dated April 20.
"Ind-Ra believes that export-oriented apparel manufacturers with unhedged receivable positions will be hurt the most, due to their geographically concentrated (US and Europe) earnings profile, low market share and restricted bargaining power with their global clients," the report said. The Fitch group company expects EBITDA margin erosion of around 150 basis points in fourth quarter of FY 17.
Source: The Economic Times