Software, pharmaceuticals and other service export companies could be the worst-affected by the Indian rupee touching Rs40.64 to the dollar, almost a nine-year high.
Essar Oil Ltd, Dr Reddy’s Laboratories Ltd, United Phosphorus Ltd, Tech Mahindra Ltd are specifically among the companies most vulnerable to the stronger rupee because exports form a high percentage of their profits and earnings, according to a new report from Credit Suisse’s brokerage arm.
Of the top 20 companies with a high net profit exposure, seven were in the software segment, five were pharmaceutical firms, two were hotel companies and one each were in plastics, chemicals, auto components, oil and gas, telecom and engineering sectors.
The rupee has risen, somewhat unexpectedly, 8.5% against the dollar from the beginning of this calendar year through Friday, the report said. The rise makes the Indian unit the fourth-highest appreciating currency worldwide in 2007.
With the Reserve Bank of India finding it difficult to shore up the rupee, its rise could be a “permanent adjustment”, said Nilesh Jasani, research analyst at Credit Suisse, who authored the report. “We expect the rupee to be in the Rs40 to Rs40.5 range next March,” he added.
Software companies could be most impacted by this because most of their revenues come from exports and “they had factored the rupee to be at around Rs43. Now that it is much higher, their margins are bound to be affected”, said Krishnakumar Karva, managing director of Emkay Securities. Operating profits could be 28% for the next quarter, down 2% and earnings per share growth could be down to around 25%, 4%-5% less than for the quarter ended March, for companies such as Infosys Technologies Ltd and other software companies, according to Lalit Thakkar, head of research at Angel Broking, a securities house.
Net foreign-exchange earnings make up 51% of sales at Tata Consultancy Services Ltd, 56% at Infosys and 35% at Wipro Ltd. They compose 33% of sales at Dr Reddy’s, 31% at Cipla Ltd and 20% at Lupin Ltd, the report said. Bottomlines for pharmaceutical companies could be affected by 2% to 3% because of the rupee’s upward move, according to Angel Broking’s research. “This could be a test of pricing power,” said Credit Suisse’s Jasani.
Companies and sectors that are able to increase prices, such as hotels and transportation, could be relatively shielded from this. Hotel companies could reduce the blow by increasing room rates while not affecting occupancy because of the scarcity of hotel rooms in many cities, say analysts.
But in the case of software, pharmaceutical, auto components and textile export companies, “they have very little pricing power”, Jasani said.
“India and China have the highest export capabilities and both have an appreciating currency. So, they will have some leverage in managing this,” said Deven Choksey, managing director of KR Choksey Securities. “Small and medium enterprises with large export revenues are facing tremendous pressure on margins,” said Amitabh Chakraborty, president equities at Religare Securities.
On Monday, 7 may, Standard Chartered Bank revised its year-end estimate for the rupee to Rs42.20 against the dollar from Rs43.80 earlier.