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Tuesday December 7, 9:00 AM

Rupee appreciation: Hits and misses...

By Equitymaster.com

After depreciating by 6.2% between April 2nd 2004 to August 6th 2004, the Rupee
has appreciated by as much as 5.7% since then. While most attribute this appreciation
to the greenback's weakness as opposed to Rupee's strength, one cannot ignore the fact
that it has implications on the stock market and profitability for India Inc.

Without getting into the complexities of why the Dollar is tumbling, we take a closer look
at the top importers and exporters of the country and what is the magnitude of impact?
The data is of FY04 from the Quantum Universe of 350 companies. All figures are as a
percentage to sales, on a standalone basis. We have divided the export dependent sectors
into three sets i.e. software, pharmaceuticals and companies from other sectors.

The exporters lobby (% sales - FY04)

Software Pharma Other sectors
Satyam Computers 90.2 Wockhardt (WCKH.BO, news) 36.6 Nalco 55.3
Hughes Software 94.3 Cipla (CIPL.BO, news) 44.1 United Phosphorus 57.3
Geometric Software 95.1 Lupin 47.3 Satnam Overseas 57.6
Infosys 95.2 Aurobindo 51.0 Ashapura Minechem 58.6
i-flex 95.3 JB Chemicals 51.8 EIH 58.6
Mastek (MAST.BO, news) 95.9 Dr. Reddys 58.9 Hotel Leelaventure 66.5
Digital 98.2 Biocon 59.8 Sesa Goa 69.7
Patni Computers 99.6 Ranbaxy 62.4 Welspun India (WLSP.BO, news) 74.3
Mphasis BFL 99.6 Orchid Chemicals 76.6 Himatsinka Seide 92.5
VisualSoft (VISO.BO, news) 100.0 Divis 85.4 Suraj Diamonds 92.8

Given the fact that software exports (including ITES) accounted for an estimated 17.9%
of the country's exports in FY04, it is not surprising to see that the contribution of exports
to revenues of technology companies are higher. But there is one crucial factor, which
investors need to consider. While the Rupee has appreciated against the Dollar, the rupee
has actually depreciated against the Euro for the period between August 6th, 2004 to
December 1st, 2004.

What is therefore important to consider here is the contribution of US to total revenues of

software companies, which are dollar denominated. Based on our estimate of the top
three software services companies in India viz. Infosys, Wipro (WIPRd.BO, news) and
TCS, US accounted for 59.8% of combined revenues in FY04. Therefore, the recent
Rupee appreciation will have a negative impact on the software sector. The magnitude of
impact is likely to differ between companies. Our interaction with five of the software
services companies suggest that the companies have hedged themselves against the
Dollar for the next twelve months and to that extent, the impact is mitigated. The new
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contracts that are likely to be signed from here on will factor in this rupee appreciation
and to that extent, there will be a negative impact. Having said that, considering the
strong move towards offshoring in the global markets, higher growth in revenues could
partially offset for this dollar appreciation.

Moving away from software companies, domestic pharma majors are also highly
dependent on exports viz. US, Europe, South America and SAARC countries. Of the
consolidated revenues of Ranbaxy, 43% was accounted by the US markets in FY04. In
the case of Dr. Reddy (REDY.BO, news) 's, the contribution stood at lower at 28% in
FY04. While companies like Biocon, Nicholas Piramal and Wockhardt do not have
significant US contribution as of now, going forward, this is likely to increase and to that
extent, margins may be affected. Besides pharma majors, other sectors from the list that
are highly dependent on exports are hotels (Hotel Leelaventure and EIH) and Nalco. On a
conservative basis, dollar denominated revenues account for atleast 60% of room
revenues of hotel companies. While the removal of the quota regime is a positive for the
textile sector, if rupee continues to trade firm or appreciate, it may not be that profitable.
In this context, expectations need to be realistic.

The importers lobby (% sales - FY04)

Energy & petrochem Other sectors
HPCL 18.1 Mercator Lines 56.9
Gulf Oil (GULF.BO, news) 18.9 Welspun Gujarat 60.0
Southern Petrochem 22.1 Apar Industries 60.5
Flex Industries 24.3 D-Link India 63.8
IOC 31.0 Sterlite Industries 66.7
Finolex (FINX.BO, news) 36.0 Zuari Industries 68.6
Chennai Petro 60.7 Suraj Diamonds 75.1
Kochi Refineries 62.4 Moser Baer 76.1
Reliance (RELI.BO, news) 65.2 STC India 78.9
MRPL (MRPL.BO, news) 67.0 Godavari Fertilisers 86.3

The biggest beneficiaries from the Rupee appreciation are importers, as the Dollar is now
worth less for every rupee or to put it in different terms, less rupee can buy more dollar
denominated assets/commodities/goods. Among the importers, companies from energy
dependent sectors are likely to benefit in a significant manner (energy, paints and few
textile majors). Companies that source raw materials from the global markets and are
largely domestic demand driven could potentially witness margin improvement. Besides
companies, rupee appreciation is also a positive for the government's financials and
capital goods sector (most of the equipments are imported, as the country is technology
deficient).

To conclude, as India's trade with global markets increase (this includes imports, exports,
FII inflow and FDI inflow), the impact of exchange rate movements cannot be
underestimated. Take the hypothetical case of an FII, who has invested in Indian stocks.
Assume that this FII has invested US$ 100 in the Indian stock markets in FY03 through a
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mutual fund house in the US when the the Rupee/Dollar rate was say, Rs 46 for every
dollar (Rs 4,600 is the sum invested). Assume that the market value of this investment
has increased to US$ 150 now (50% gain at the same exchange rate or Rs 6,900). But
with the rupee appreciating against the dollar (at the current exchange rate of Rs 43.6 for
every dollar), the FII will only realise Rs 4,796. Almost 30.5% of reduced return on
investment! So, at times, adverse exchange rate movements could affect money flow into
the country. Since exchange rate movement is not only dependent on what is happening
in India but also in the US, the complexity increases dramatically.

Without trying to be 'doomsayers', investors need to take a balanced view on factors like
exchange rate, interest rate trend in the US and so on, before jumping onto the hot 'India
story'.

India’s Rupee Appreciation Isn’t a ‘Major Concern,’

Chawla Says
May 02, 2010, 10:15 PM EDT

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By Shamim Adam

May 3 (Bloomberg) -- The Indian rupee’s longest winning streak in three years isn’t a
“major concern” for exports, Finance Secretary Ashok Chawla said, pointing to inflation
as a bigger challenge for policy makers.
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The Reserve Bank of India is studying the movement of the rupee and there isn’t a case
for capital controls at this stage, Chawla said in an interview yesterday in Tashkent,
Uzbekistan, where he is attending the Asian Development Bank’s annual meeting.
Inflation at current levels are not “socially, economically or politically acceptable,” he
said.

The gains in the rupee will make imports cheaper and contribute to slowing India’s
inflation, which has become a top political issue in the country in recent weeks. The
rupee had a fourth monthly gain in April as overseas investors bought local assets on
optimism economic growth will accelerate in India.

“Inflation is certainly high, there is no doubt about it,” Chawla said. “There is no getting
away from it. We hope to get back to average inflation of about 5 percent to 5.5 percent
by the end of 2010.”

India’s benchmark wholesale-price inflation accelerated to 9.9 percent in March,

prompting the central bank to raise interest rates for the second time in a month on April
20.

Exports rose 34.8 percent in February as demand increased in the U.S. and Europe.

Chawla said prices are rising because of “supply side” factors including a shortage of
food. He said prospects of sufficient rains this year will reduce food prices.

Opposition Pressure

Bharatiya Janata Party, the nation’s biggest opposition party, led the attack in parliament
on Prime Minister Manmohan Singh’s government for failing to curb prices, and
repeatedly stalled proceedings on the issue.

The rupee closed at 44.3575 per dollar on April 30, 1.3 percent higher than it was at the
end of March, according to data compiled by Bloomberg. The currency reached 44.165
on April 15, the strongest level since September 2008.

Foreign investment in the nation’s bonds and equities reached record highs last month,
exchange data show, as companies including Infosys Technologies Ltd., India’s second-
largest software services provider, posted earnings for the last quarter that met or
exceeded the projections of analysts surveyed by Bloomberg.

Foreign holdings of India’s stocks and bonds reached all- time highs of $79.1 billion and
$13.1 billion, respectively, on April 27, according to data from the Securities and
Exchange Board of India.

The $1.2 trillion South Asian economy will grow at least 8 percent in the financial year
that started April 1, compared with an estimated 7.2 percent in the previous 12 months,
the central bank said April 20.
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--With assistance from Anil Varma in Mumbai. Editors: Cherian Thomas, Alastair Reed

%INR

To contact the reporter on this story: Shamim Adam in Tashkent, Uzbekistan at

sadam2@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net