Mumbai: The sharp appreciation in the rupee against the dollar in recent months is likely to have dented June quarter profitability of exporters that source locally and have limited pricing power, Crisil Ratings said in a release on Tuesday, and flagged that a further rise in the Indian unit could impact credit profit of such exporters.
“While a majority of exporters have weathered the forex storm so far, any significant rise in the rupee from here would impact credit profiles of exporters in the vulnerable sectors," said Anuj Sethi, senior director at Crisil Ratings.
“The rupee’s relative strength versus competing currencies, and business challenges constrain the competitiveness of exporters in some sectors," added Sethi.
The Indian rupee had appreciated 5.2% in the first half of 2017 to 30 June.
Crisil said that the credit profiles of a majority of exporters rated by it have weathered the currency appreciation so far, even as profitability was impacted.
The sectors and companies having natural offsets such as sizeable imports, or foreign currency loans and currency hedges, would be less impacted, Crisil added.
Its analysis of the largest 10 export-oriented sectors from its rated portfolio showed that leather, textiles, meat, seafood and basmati rice sectors were the most vulnerable to rupee strengthening, and foreign currency losses for these exporters—assuming everything else was business as usual—are estimated at 200-300 basis points (bps) of net sales during the first quarter.
One bps is one-hundredth of a percentage point.
According to the ratings agency, in the case of exporters of pharmaceuticals and agrochemicals, the impact would be much lower at around 150 bps, given that their imports provide a partial hedge, and for the gems and jewellery sector, exports largely match imports leading to minimal impact.
The information technology (IT) sector, too, would be the least affected given the extensive hedging practised there, but the extent of hedge in terms of time period will determine the impact on individual companies.
At the net profit level, the impact would be 50-150 bps because of another offset—forex-denominated working capital loans—availed of by most exporters.
That said, the credit profiles of exporters will only see a marginal impact.
Among Crisil’s rate portfolio, leading exporters in IT, pharmaceuticals and agrochemicals sectors have high operating margins of 15-25%; they have sufficient cushion to absorb forex losses.
This said, the impact of further appreciation in the rupee on the credit metrics of exporters, and the measures taken to guard against future volatility, will be the key monitorables, according to the ratings agency.
Challenges on the demand front such as IT, pharmaceuticals, leather sectors facing pricing pressure or sluggish demand in the US and Europe, and those on the supply side such as leather, meat sectors facing availability issue due to cow slaughter ban leave exporters rated below “CRISIL BBB-" or those with limited hedging and pricing power, more vulnerable, it said.