The sharp appreciation of the rupee against the USD of late has caught the fancy of investors and corporates at large. We tried to look at the impact that this sharp appreciation actually has on the various sectors.

The rupee has appreciated very sharply over the last one year against all the major currencies, especially against the dollar. Against the dollar, the rupee has appreciated 12.8% from the peak USD/INR rate and 5.1% since the beginning of FY08. Against the Euro and the GBP it has appreciated 9% from the peak rate and 5.5% since the beginning of FY08.  It is therefore very important to understand the impact that it will have on different sectors as each sector has some or the other exposure in foreign currency. Some have revenues coming in a foreign currency, where some may have foreign currency denominated expenses and some have balance sheet items, which relate to foreign currency. Below, we take the sectors and try to understand the factors where they stand to lose or gain in this rupee-appreciating environment.

NEGATIVE IMPACT

IT Services: The IT Services industry in India, derives most of its revenues in USD, Euro or GBP, with the contribution of the USD at 60-65%. The rupee has appreciated about 3-5% more than the assumptions that the companies have used for providing FY08 guidance, implying that most of the companies will report lesser than guided revenues in INR. However, at the same time these companies also have large forward covers, which will come in as “Other Income’ and therefore shall save the bottom line. Moreover, the pricing within the big players is improving, which will also offset the impact. Companies with more exposure to the US will be impacted the maximum. Amongst the large players, TCS has the highest non-USD, Euro or GBP revenues and Patni has the highest exposure to the USD

Textiles: Textiles plays a major role in the forex earnings of the country as it has a significant exposure to exports. In the export market, the Indian manufacturers are head on with the Chinese and so the appreciating rupee will render them less competitive. Although there are also certain import elements in textiles, the net impact is still negative as the exports component is significantly higher.

Metals and Mining: All the metal prices are quoted in USD terms. With everything else in line, only an appreciating rupee will pull down the domestic prices being just a conversion of the international prices. Moreover, many companies in the sector are export oriented. Miners have revenues in USD terms and expenses in rupee terms. Appreciation of the rupee will impact margins negatively.

NEGATIVE TO NEUTRAL

Auto and auto parts: Just when the auto companies, started to lay more emphasis on exports, did the rupee start appreciating. This will lead to lower realizations in INR and reduced competitiveness. However, the industry is also import dependent to a great extent, which means that companies who are net importers will benefit, and vice-versa. Where Maruti is a net importer, Bajaj Auto, M&M, Ashok Leyland, Tata Motors are net exporters.

NEUTRAL TO POSITIVE

Oil & Gas: As domestic prices follow international prices and margins are in USD terms, it is negative for E&P companies and refining companies. Petrochemical manufacturers also will have a negative impact on the same grounds. But there are the refining and marketing companies who have been suffering under-recoveries. These will stand to gain on the appreciating rupee. Reliance and Cairn are likely to be negatively impacted as they are into E&P and refining (Reliance).

POSITIVE

Print media: Here, the revenues are rupee denominated and the major cost that is newsprint (60% of revenues) is imported, so the rupee appreciation is in fact a major positive. The English newspapers use a higher percentage of imported newsprint so they are to be more benefited from within the print media pack.

Construction and Engineering: This segment also predominantly draws more than 70% of its revenues domestically. It is also in fact a net importer where key items like raw materials; spare parts etc. are imported and form a major cost element. Moreover, most, if not all these companies have a good amount of foreign borrowings in their books, which when in INR terms is restated shall amount to lowered finance costs or reduced cost of capital, which is again margin positive, for this sector.

Utilities: This sector imports equipment and fuel. Being domestic, they earn 100% in INR and pay most in USD terms. Most of the companies in this segment being into active investment mode and equipment forming a large part of the capital cost, the overall capital employed will reduce and thus the benefit gained will be for a long term. Here also, there are large USD or Yen denominated borrowings, which again will be restated and thus further reduce the amount of capital employed. Higher return ratios will therefore make this sector very attractive. Increasing fuel prices, a concern till now, will now also be mitigated partly because of the currency impact.

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