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The Silver Lining in Sliding Rupee

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The falling rupee hurts the Indian economy, however, it benefits companies that are net exporters. Five such companies IE&M has selected which will benefit from falling rupee as these companies have been earning major revenue from international markets and have a very low forex liability.

 

By IE&M Research
The mood in the Indian equity market is grim. Volatility and choppiness have become the character of the market ever since Union Budget was presented on the February 1st. After giving a handsome return of around 28% in year 2017, the equity market is looking a pale shadow of its 2017 performance. Although there is some positive return given by the equity benchmark index in local currency, in USD terms, it has generated one of the worst returns among the Asian market. Contrary to the current situation, in the year 2017 India was among the three emerging markets, which gained more than 35 per cent in 2017 in dollar terms apart from Hungary and South Korea.
The once poster boy of global investment fraternity it is fast losing its coveted position. The year that started with such good note wherein everyone was upbeat about the Indian economy the equity market has suddenly found itself on a slippery ground. Although, Sensex and Nifty are flat in terms of performance from start of the year, many of the stocks have taken a deep cuts and trading at their 52 weeks low. Moreover, the broader market index like BSE Mid CAP and Small CAP are down by 11.91 per cent and 11.72 per cent respectively from the start of the year.
There are many reasons attributed to such fall in the equity market, including the global factors. Nevertheless, one reason that clearly stands out is sharp and steep fall in the external value of Indian rupee (INR). Year till date INR has remained the worst performer against US dollar compared to other major Asian currencies. It has depreciated by 4.7% year till date (May 22, 2018) compared to 2.8% by Indonesian Rupiah and one percent by Korean Won. Currency like Japanese Yen and Thai Baht has appreciated against US Dollar in the same period.

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Nonetheless, USD in general has strengthened against major currencies globally. The rise in the 10-year Treasury bond yield to the 3% level has helped USD to strengthen which is also partially responsible for sell-off in emerging markets especially debt.
Strengthening dollar has hurt the Indian market, but what is also going against the INR is rising crude oil prices. It has been increasing since the start of June 2017 and has moved by 10% year till date. According to a report, every 10 US dollar a barrel increase in oil price would worsen the current account by 0.4% of the gross domestic product. It would push inflation by 30-40 basis points, hurt growth by 15 basis points and worsen the fiscal balance by 0.1% of GDP.
The last time we saw such situation when the INR was in a free fall was in year 2013, which made India part of ‘Fragile Five.’ Currently India is nowhere near to that situation. Our twin deficits are far better placed. Nonetheless, looking at the current strengthening in the USD and sustained rise in crude oil prices, we see weakness in the INR to remain. Add to that next year being the general election year, which means government will refrain from taking tough decisions like passing on the rise in crude oil prices to consumers and worse, it may announce some populist measures that may further impact the health of the economy.
Sooner or later it must reduce the excise duty on crude oil that will put further pressure on its fiscal that will lead to higher inflation and again a weaker rupee. Hence, going ahead, we are staring at the weakening of INR.
So, what this means for investment as every coin has two sides. Sliding rupee will have a positive impact on certain sectors that are net exporter and have major revenue in US Dollar. Even if everything remains same, the translation impact will help these companies to post better numbers. Sectors like IT, Pharma, Textiles and Automobiles benefit from a weak rupee since they are all net foreign exchange earners.
Here in the last table we can see the monthly correlation co-efficient between the INR and various BSE sectoral indices since the start of year 2012. We can see that most of the sectors studied are negatively correlated with rupee. What this means is that the depreciating rupee will help companies in these sectors to perform going ahead.
Once we had identified the sectors that are going to benefit from falling rupee, we deep dived into the companies in the sector and analysed their financials along with their competitive advantage in international markets.
We are presenting the list of five companies that we believe will benefit from falling rupee as these companies earned major income from international market and have a very low forex liability.

Balkrishna Industries

Balkrishna Industries Ltd. is a manufacturer of off-highway tires (OHT) used in mining and agriculture applications. The company focuses on the production of a range of off-highway tires that includes agricultural, industry, material handling, forestry, lawn and garden, construction and earth moving tires. Headquartered in Mumbai, the company presently has four subsidiaries in Europe and North America. In the domestic market, the company supplies to all the major construction equipment manufacturers and has a presence in the replacement market of the road construction sector. The volume of the company’s product is likely to improve considering a strong demand outlook in its export markets given the encouraging commentary by major companies including Caterpillar and Michelin. The US-based Caterpillar raised its earnings guidance by 23% to $10.25-11.25 per share for the current year following investments by several mining customers in new projects as well as for replacement of existing tyres. The company will remain the primary beneficiary of the falling rupee as it earns more than 80% of its revenue from export. The company has shown growth in its topline and bottomline in both quarterly basis as well as on a yearly basis. Shares of the company is currently available at TTM PE of 29.47x.

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Genesys International Corporation Limited

Genesys International Corporation Limited (Genesys) is an IT company specializing in Geographical Information System (GIS) and Geospatial Engineering domain. The company provides world-class geospatial, engineering and information technology solutions to the Utility, Telecom, Energy, and Government, Oil and Gas and PetroChemical sectors. The demand for ‘map-based’ decision support system across various enterprises is increasing and it has been adapted in the mainstream IT industry. We see that this industry has a huge scope and many government initiatives will include these services in their implementation. Once all the activities get automated, GIS will become an inseparable component for all the enterprises. The company earns most of its revenue in foreign currency. In last six years ending FY17, the average revenue earned by the company in forex is around 80 per cent. Although the company has seen its sales declining on a yearly basis in FY16, however, it has seen a decent increase in the last couple of years. The company is trading at TTM P/E of 24.5x with TTM EPS of `9.70. Its ROE and ROCE for FY17 was 8.5% and 9.7%, respectively. We see the immense potential of LiDAR technology in Automobiles and the next generation driver experience for cars.

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Syngene International

Incorporated in 1993 as a subsidiary of Biocon, Syngene International Limited (SIL) is a leading contract research organisation (CRO), which supports R&D programmes of global innovative companies. SIL offers outsourced services to support discovery and development for organisations across industrial sectors like pharmaceuticals, biopharma-ceuticals, neutraceuticals, animal health, agro-chemicals, etc. It currently caters for 293 global players, including Bristol-Myers Squibb (BMS), Abbott, Baxter and Amgen, among others. SIL derives approximately 95% of its revenues from exports. In terms of classification on a contractual basis, it derives around 33% of revenues from long term dedicated contracts with a contractual commitment of five years and more. SIL’s revenues grew at around 21% CAGR in FY13-18 to `1423 crore due to new client addition on a regular basis and scaled up revenues from existing clients led by integrated service offerings, high data integrity ethos and continuous endeavour to move up the value chain. The capabilities have been vindicated by proven customer stickiness as eight of the top 10 global pharma companies have been availing the services for the last five years. As of FY18, the company had a client base of 316. For the quarter ended 31 March 2018, the company has reported a consolidated sales of `409.10 crore, up 5.52%.

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AIA Engineering Ltd.

AIA Engineering Limited is engaged in the business of designing, developing, manufacturing, installing and servicing of high chromium wear, corrosion and abrasion resistant parts. These products are mainly used by cement, mining and thermal power generation industries. The company’s product portfolio consists of high chrome grinding media, liners, vertical mill spares, diaphragms and mining liners. The company is slated to increase its capacity from 340000 TPA to 440000 TPA over the next two years by adding 50000 TPA each year. Q4FY18 and FY18 volumes grew 14.3% and 6.6% to 66375 and 228274, respectively, with capacity utilisation of about 67%. Net realisation per tonne grew 3.9% on a YoY basis to `108.5 per kg. AIA will continue to focus on the replacement mining market where penetration of high chrome consumable is still very low. The bulk of future growth is expected to come from the international market and in the mining segment. The company has already received a long-term order from the Barrick group of 18000 TPA. The order book is at `744 crore. During the quarter, the mining segment (60% of business) registered a robust volume growth of 21% and is expected to continue the momentum with incremental volume sales in the mining segment estimated to be in the range of 40000 to 50000 MTPA from FY19E onwards.

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Persistent Systems

Persistent Systems Ltd is an OPD specialty company, offering the customers the benefits of offshore delivery. The company designs, develops and maintains software systems and solutions, creates new applications and enhances the functionality of the customers’ existing software products. The company also engaged in the business of Telecom & Wireless, Infrastructure & Systems, Life Sciences & Healthcare. Management of the company is hopeful that its co-creation business model in digital services will drive its revenue growth in FY2019. Further, traction in the European region for its digital business, strong deal pipeline and additional revenue (PARX acquisition) will aid growth in FY2019. To add that, management noted that its FY2019 revenue growth is expected to exceed NASSCOM’s revenue growth guidance (7-9%) for the industry, with recovery in margins. For the quarter ended 31 March 2018, the company has reported a consolidated sales of `752.55 crore. The stock has already corrected to close to 12% post a poor show in Q4 results due to dip in the IP business. This development is mostly factored the earnings weakness in Q4FY2018E. We expect an IP revenue decline in Q4 to be a one-off event and going forward the company will continue to post healthy results.

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About the author: IE&M Team

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