Rupee could breach 68 levels; 10 cos that are likely to benefit the most

The Indian rupee, which slipped over 5 percent so far this year against the US dollar, could depreciate further to 68/USD. This could spell trouble for companies that have a higher amount of dollar-denominated debt on their books, but will prove to be a boon for export-focused companies.

The rupee ended at 66.90 against the dollar on Wednesday, a level last seen on February 22 last year. Fears of widening trade deficit, a rate hike by the US Federal Reserve and rising oil prices, which are hovering near USD 75 a barrel, are mounting pressure on the Indian currency, experts suggested.

The pressure on the home currency could even intensify, considering that the dollar grew in strength as US treasury yields moved upward of the 3 percent mark earlier this week and hit 4-year highs.

“Well, Rs 68/USD is a fair possibility. The weakness that set in following fears of a trade war has now been accentuated by USD’s strength ahead of FOMC rate decision,” Anand James, Chief market Strategist at Geojit Financial Services, told Moneycontrol.

“However, with forex reserve at record highs, the threat of a unilateral fall in rupee past 70 looks limited. Further, USD’s gains, presently piggyback on FOMC rate hike prospects are expected to become progressively smoother rather than steep,” he said.

The dollar index, which measures the strength of the greenback against a basket of six currencies, was trading near a three-and-a-half-month high on Thursday, after the 10-year benchmark US Treasury yield breached the 3 percent mark earlier this week for the first time in four years.

The rupee has also been under pressure because of foreign institutional investors persistently selling their equity holdings, which typically results in increased demand for the dollar. Given the recent swings in the dollar-rupee pair, traders and importers are rushing to cover their dollar positions.

“Dollar strength is one of the key reason for INR weakness. FPIs have been net sellers in Indian fixed income to the tune of Rs 6,700 crore calendar year to date. That is also aggravating the pain,” Lakshmi Iyer, Chief Investment Officer - Debt and Head – Products at Kotak Mutual Fund, told Moneycontrol.

In addition to this, rising crude oil prices are adding to fears that the government might not be able to meet its own fiscal deficit guidance of 3.3 percent of GDP in FY19.

“Crude is trading up approximately 33 percent on a year-on-year basis and approximately 13 percent on a year-to-date basis. India being a major importer of crude, the country’s oil import bill is likely to increase 20 percent to USD 105 billion this financial year from USD 88 billion in FY18, as per estimates by the petroleum and natural gas ministry,” Hemang Jani, Head - Advisory, Sharekhan by BNP Paribas, told Moneycontrol.

“Assuming the average price of crude pegged at USD 65 per barrel, the fiscal deficit situation will be affected further due to a depreciating rupee. A surge in US treasury yields, coupled with sell-off in global equities, has resulted in the strengthening of the US dollar against the Indian currency,” he said.

Which stocks are likely to be impacted the most?

Given the recent appreciation of the dollar, companies that have higher dollar-denominated debt on their books could soon be under pressure. Of course, the situation would be completely different for companies that are export-focused.

Analyst: Anand James, Chief market Strategist at Geojit Financial Services

“OMCs such as HPCL, BPCL, IOC have already taken a beating on account of lower margins, as fuels priced in the dollar have gone up with rising oil prices. But given the recent sharp falls, BPCL, in which we currently have a held view, has room for recovery,” said James of Geojit Financial Services.

“Among the stocks, we are positive on names like Cyient and Persistent, which have more legs on the upside given the weakness in the rupee,” he said.

Analyst: Hemang Jani, Head - Advisory, Sharekhan by BNP Paribas

Hemang Jani of Sharekhan by BNP Paribas reckons information technology and pharmaceutical companies with exposure to the US stand to benefit the most from a falling rupee.

“Companies like Infosys, TCS, HCL Technologies are likely to benefit the most on account of larger US exposures and dollar billing,” he said. “In the pharma pack, Sun Pharma and Lupin derive approximately 45-48 percent of their revenues from the US region. Investors need to note that currency is just one factor, hence, they must consider other aspects like business outlook, valuation, etc. before investing.”

Analyst: Soumen Chatterjee, HoR, Guiness Securities

Depreciating currency will adversely impact capital-intensive sectors and firms with foreign borrowings and those who import raw materials heavily. Automobiles, capital goods, petroleum, power and telecom companies will bear the brunt of a weak rupee.

Moreover, Rupee depreciation will weigh on margins for most sectors of India Inc, which is already reeling under the pressure of slowdown in demand globally besides margins coming under pressure and earnings downgrades.

IT and Pharma companies like Infosys, TCS, Natco Pharma, Aurobindo Pharma will get benefited due to weaker rupee and stronger dollar. Oil marketing companies such as IOC, HPCL, will get adversely impacted due to rise in strength of dollar since they are the major importers.

Brokerage Firm: Macquarie

Gujarat Pipavav:

For every 5 percent the rupee depreciates by, Gujarat Pipavav’s earnings increase by around 6 percent, Macquarie said in its note. The stock is attractively priced at a free cash flow yield of 6.9 percent, going by FY19 estimates.

Analyst: Vinay Rajani, Technical Analyst, HDFC Securities

Take Solutions:

The primary trend of Take Solutions is bullish as the stock has been forming higher tops and higher bottoms on the daily chart. An appreciating dollar against the rupee is also going to help the company perform better going forward.