CRISIL Research, India’s largest independent and integrated research house, expects India Inc to be severely impacted by the rupee’s depreciation against the dollar given the large foreign currency debt on the books and only partial hedging. Moreover, the rupee’s depreciation will lift input costs across many sectors amidst weak demand environment as reflected in low double digit topline growth expected in 2013-14. Even exporters are unlikely to benefit significantly as clients may seek to renegotiate contracts. We expect the rupee to strengthen from its current levels, but the 2013-14 average will still be 5-8 per cent weaker than the 2012-13 average.
Mark-to-market losses and higher debt servicing costs are likely to be key pressure points in the near term. According to Mukesh Agarwal, President, CRISIL Research, “For companies in the CNX Nifty (excluding banking and financial services), around 40 per cent of debt is denominated in foreign currency. In total, corporate India had forex debt outstanding of over $200 billion as of March 2013, of which close to 45 per cent is short-term debt. Moreover, only half their forex exposure is hedged. Persistent weakness in the rupee and heightened volatility has reduced the benefits of borrowing overseas.” From the growth and profitability perspective, sectors that will be negatively impacted by the rupee’s depreciation include automobiles, auto components, airlines, consumer durables, oil marketing companies (OMCs), and fertilisers. The increase in fuel costs will hurt demand for automobiles, especially small cars, as fuel alone accounts for nearly 25-30 per cent of the ownership cost of a small car in the year of purchase.
Airlines with a high proportion of revenues accruing from domestic operations will also be hurt as 70 per cent of their operating costs are incurred in dollars, and their ability to pass on any cost increase is limited. We do not expect diesel prices to increase by more than Rs 1.50 per litre from the current level; therefore, a weak rupee would increase under-recoveries of OMCs. We foresee under-recoveries touching Rs 1,050 billion in 2013-14, 10 per cent higher than our previous estimate.
The upside for export-oriented companies, generally the biggest beneficiaries of a depreciating currency, will also be limited as clients are likely to renegotiate deals. We expect tier-1 IT services companies to report a 50-100 basis points (bps) improvement in EBITDA margins in 2013-14 due to a pick-up in business momentum and utilisation levels. Others who will benefit include pharmaceutical and readymade garment exporters, crude oil producers and pure-play refineries.
“Demand growth and competitiveness, rather than currency movements, are more critical to determining growth and profitability. Our view is corroborated by the modest performance of exportoriented industries in 2012-13, a year in which the rupee depreciated by 14 per cent against the dollar on a year-on-year basis. Around 180 listed export-oriented companies reported a marginal 1-2 per cent growth in revenues in dollar terms and 60-bps rise in EBITDA margins in 2012-13, despite a weak currency,” says Prasad Koparkar, Senior Director, CRISIL Research.
Mark-to-market losses and higher debt servicing costs are likely to be key pressure points in the near term. According to Mukesh Agarwal, President, CRISIL Research, “For companies in the CNX Nifty (excluding banking and financial services), around 40 per cent of debt is denominated in foreign currency. In total, corporate India had forex debt outstanding of over $200 billion as of March 2013, of which close to 45 per cent is short-term debt. Moreover, only half their forex exposure is hedged. Persistent weakness in the rupee and heightened volatility has reduced the benefits of borrowing overseas.” From the growth and profitability perspective, sectors that will be negatively impacted by the rupee’s depreciation include automobiles, auto components, airlines, consumer durables, oil marketing companies (OMCs), and fertilisers. The increase in fuel costs will hurt demand for automobiles, especially small cars, as fuel alone accounts for nearly 25-30 per cent of the ownership cost of a small car in the year of purchase.
Airlines with a high proportion of revenues accruing from domestic operations will also be hurt as 70 per cent of their operating costs are incurred in dollars, and their ability to pass on any cost increase is limited. We do not expect diesel prices to increase by more than Rs 1.50 per litre from the current level; therefore, a weak rupee would increase under-recoveries of OMCs. We foresee under-recoveries touching Rs 1,050 billion in 2013-14, 10 per cent higher than our previous estimate.
The upside for export-oriented companies, generally the biggest beneficiaries of a depreciating currency, will also be limited as clients are likely to renegotiate deals. We expect tier-1 IT services companies to report a 50-100 basis points (bps) improvement in EBITDA margins in 2013-14 due to a pick-up in business momentum and utilisation levels. Others who will benefit include pharmaceutical and readymade garment exporters, crude oil producers and pure-play refineries.
“Demand growth and competitiveness, rather than currency movements, are more critical to determining growth and profitability. Our view is corroborated by the modest performance of exportoriented industries in 2012-13, a year in which the rupee depreciated by 14 per cent against the dollar on a year-on-year basis. Around 180 listed export-oriented companies reported a marginal 1-2 per cent growth in revenues in dollar terms and 60-bps rise in EBITDA margins in 2012-13, despite a weak currency,” says Prasad Koparkar, Senior Director, CRISIL Research.
