Mumbai: The flow of foreign institutional investor money into the Indian stock markets has for long been considered the main link between the global economy and domestic share prices. But another link has strengthened in the past few years, thanks to growing exports and large overseas acquisitions by Indian firms, which have made corporate revenue increasingly sensitive to global shocks.
In 2005, around one-fifth of Sensex companies’ revenue came from exports and overseas operations. For fiscal 2009 and 2010, this share has increased to nearly one-third, forcing investors to take a closer look at parameters such as economic growth overseas and cross-currency movements.
This calculation is based on the revenues of 23 Sensex firms which have an overseas footprint and have been part of the index since 2005. For 12 of the firms, fiscal 2009 numbers have been considered, since they were the latest available.
For instance, Reliance Industries Ltd, India’s most valuable company, derives only 42% of its revenues locally, compared with 66.35% in fiscal year 2005. Hindalco Industries Ltd, the country’s top aluminium maker, now gets only 22% of its revenue from India, compared with 72% in 2005.
To be sure, software exporters always have had the lion’s share of revenues from overseas markets such as the US and UK. But now, other companies such as Larsen and Toubro Ltd, too, are making inroads into global markets. The engineering services firm now gets nearly 30% of its revenues from overseas operations, compared with some 23% in 2005.
For investors, it has complicated things as they now have to track not only domestic economic and market indicators, but also those from a variety of foreign countries.
Naveen Kumar Saini/Mint
“There are more variables to consider now,” said Satish Ramanathan, who helps manage Rs12,718 crore at Sundaram BNP Paribas Asset Management Co. Ltd. “Investors have to understand the diversity of the export basket, for one.”
“One has to be more aware of things like cross-currency movements and cost structures out there (in foreign countries),” said Sandip Sabharwal, CEO, portfolio management services at brokerage Prabhudas Lilladher Pvt. Ltd.
For sure, the increase in the overseas contribution of Sensex earnings has to do with some big-ticket acquisitions such as the Tata Motors Ltd buy of Jaguar Land Rover, Tata Steel Ltd’s acquisition of Corus Plc and Hindalco swallowing Novelis.
However, the increasing exposure to global shocks or surprises is not restricted to the 30 firms that constitute India’s bellwether index. It is happening at an economy-wide level. According to the Reserve Bank of India’s latest report on currency and finance, the share of manufactured exports to manufactured GDP (gross domestic product) rose from 52.2% in 2000-01 to 72.3% in 2008-09.
“This significant export-orientation of manufacturing has exposed the sector to external demand shocks,” the central bank said.
A back-of-the-envelope calculation shows that gross exports and income from service exports as a percentage of GDP increased from 19% in 2004-05 to 23% in 2008-09, the last year for which complete data is available.
But that is only part of the story. Global factors perhaps cast an even larger shadow on Sensex earnings. Local prices of commodities such as crude oil and steel track global prices, thus affecting the revenues of companies such as Tata Steel or Hindalco, irrespective of whether they sell in India or overseas.
By this logic, almost 60% of Sensex revenue sways to global beats rather than what is happening locally. Despite this, foreign institutional investors continue to buy local equities eyeing the 9.5% economic growth and 20% company earnings growth. So far this year, they have purchased some $8 billion (Rs37,680 crore) worth of local stocks at a time when US and European markets are roiled because of debt default scares and fears of a double-dip recession.