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CRISIL Insight July 2013 Rupee depreciation to hurt India Inc

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Page 1: Rupee depreciation article july 2013

CRISIL InsightJuly 2013

Rupee depreciation to hurt India Inc

Page 2: Rupee depreciation article july 2013

About CRISIL Limited

About CRISIL Research

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Last updated: May, 2013.

Disclaimer

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CRISIL Insight

Page 3: Rupee depreciation article july 2013

1

Rupee depreciation to hurt India Inc

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.

Surge in interest servicing costs for companies with forex debt

Indian companies with foreign debt on their books and without any natural hedge in the form of forex

earnings will be badly hurt by the depreciation of the rupee. This is because the outgo towards interest on

this debt, marked-to-market losses, and rollover of hedged positions will increase. Indian companies have

increasingly been resorting to borrowing abroad in order to take advantage of the lower interest rates on

offer. 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.

Increasing input costs to hurt several sectors

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,

and fertilisers. The increase in fuel costs will hurt the demand for automobiles, especially small cars, as fuel

alone accounts for close to 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, given

the sobering impact of price increases on demand. 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 oil

marketing companies. We foresee under-recoveries touching Rs 1,050 billion in 2013-14, around 10 per cent

higher than our previous estimate.

Page 4: Rupee depreciation article july 2013

2

CRISIL Opinion

Auto sales volumes expected to be remain subdued in 2013-14

as well, as fuel costs and weak economic environment bite

-30%

-20%

-10%

0%

10%

20%

30%

40%

Cars and Uvs LCVs MHCVs TW

2011-12 2012-13 2013-14 (P)

0-2% 2-4% 1-(2)%

6-8%

Source: SIAM, CRISIL Research

EBITDA margins, which touched 5-year lows in 2012-13, are

expected to remain under pressure, as input costs escalate

and demand remains weak

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2008-09 2009-10 2010-11 2011-12 2012-13

Cars and Uvs CV TW

Source: CRISIL Research

Page 5: Rupee depreciation article july 2013

3

Airlines may find it difficult to pass on the increase in ATF

costs, as any further fare hikes would adversely hit passenger

traffic

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2008-09 2009-10 2010-11 2011-12 2012-13 Q12013-14 E

Ticket prices (Y-O-Y Change)

Domestic passenger traffic( Y-O-Y Change)

Note: Ticket prices have been estimated by using Spicejet and Jet Airways.

Source: DGCA, CRISIL Research

Under-recoveries of oil marketing companies forecast to

increase 10 per cent from previous estimates

782

1,386

1,602

900-1,000

1,000-1,100

0 500 1000 1500 2000

2010-11

2011-12

2012-13

2013-14 earlier estimate

2013-14 revised estimate

(Rs billion)

Source: Industry, CRISIL Research

Page 6: Rupee depreciation article july 2013

4

CRISIL Opinion

While international prices of raw materials for complex

fertilisers have softened considerably, rupee depreciation and

limited pricing flexibility would hurt domestic manufacturers

15,000

30,000

45,000

60,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2011-12 2012-13 2013-14

(Rs / MT)

MOP DAP Phosphoric acid

Source: Fertecon, CRISIL Research

Export-oriented sectors to benefit marginally

Export-oriented companies are generally the biggest beneficiaries of the rupee’s depreciation, but CRISIL

Research believes that the current economic environment globally and renegotiation of contracts by clients

would limit the upside for these companies. Demand growth and ability to compete with other players, rather

than currency movements, are more critical in determining growth and profitability of such companies.

Our view is corroborated by the modest performance of some export-oriented industries in 2012-13, a year in

which the rupee depreciated by 14 per cent against the dollar on a year-on-year (y-o-y) basis. Around 180

listed export-oriented companies (defined as more than 75 per cent of revenues coming from exports),

together accounting for around 12 per cent of India’s total exports, 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.

Amongst export-oriented sectors, tier-1 IT services companies, which together contribute 65 per cent of the

industry's export revenues, reported a 23 per cent rise in rupee revenues, though dollar revenues grew by

only 10 per cent in 2012-13, thanks to the weak rupee. However, their EBITDA margins remained flat y-o-y

at 24.2 per cent, reflecting subdued IT spending, pressure on billing rates, and lower utilisation levels.

A similar scenario had occurred in 2008-09, when EBITDA margins remained unchanged though the rupee

fell by more than 14 per cent. Buyers of Indian bulk drugs renegotiated contracts at lower rates, resulting in a

slight decline in dollar revenue growth. In the readymade garments (RMG) segment, Indian exporters

continued to lose market share to Bangladesh and Vietnam. Export volumes to the European Union and US

slumped by 16 per cent and 7 per cent respectively in calendar year 2012, far steeper than the overall

decline in imports by these countries.

During the current fiscal, CRISIL Research expects export-oriented sectors to benefit marginally from the

depreciation of the rupee. Due to the pick-up in business momentum and utilisation levels, we expect tier-1

Page 7: Rupee depreciation article july 2013

5

IT services companies to report a 50-100 basis points improvement in EBITDA margins in 2013-14.

Formulation and bulk drug exporters are also expected to report a similar improvement in profitability. RMG

exporters may be able to recapture some volumes, as buyers abroad look at diversifying their sourcing base

after the recent collapse of a textile mill in Bangladesh. Moreover, the currencies of other competing

countries such as Bangladesh, Vietnam, and China have remained more or less stable against the dollar

since the beginning of 2013-14.

Indian rupee has depreciated most rapidly against the dollar

since March 2013 till date

-11.9%

-11.5%

-8.1%

-7.4%

-3.8%

-2.4%

-1.2%

0.1%

1.3%

-14.0% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0%

Indian Rupee

Brazil Real

Thailand Baht

Japanese Yen

S Korean Won

Pakistan Rupee

Vietnam Dong

Bangaladesh Taka

Chinese Yuan

Source: OANDA, CRISIL Research

The depreciation in currency helped prop up rupee revenue

growth of IT services companies in 2012-13…

0%

5%

10%

15%

20%

25%

30%

35%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

FY 2011 FY 2012 FY 2013

USD revenue growth Rupee revenue growth

Source: CRISIL Research

Page 8: Rupee depreciation article july 2013

6

CRISIL Opinion

…But EBITDA margins declined, reflecting the dip in business

growth and utilisation levels

21.0%

22.0%

23.0%

24.0%

25.0%

26.0%

27.0%

38.00

43.50

49.00

54.50

60.00

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

Rs/USD EBITDA margins (RHS)

Source: CRISIL Research

RMG export volumes took a beating in 2011 and 2012 as India

operates in the relatively high-value category, but volumes

have stabilised in the initial few months of 2013

7.0

-7.4 -7.2

0.9

-6.5

-8.4

-15.9

-0.4

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

2010 2011 2012 Jan-Apr 2013

2010 2011 2012 Jan-Mar 2013

US EU

(y-o-y growth in per cent)

Source: OTEXA, Eurostat, CRISIL Research

Page 9: Rupee depreciation article july 2013

7

Indian RMG exporters are also gradually regaining market

share

(per cent) 2010 2011 2012 YTD 2013

Market shares in US market (by value)

India 4.4% 4.3% 4.0% 5.0%

Bangladesh 5.5% 5.8% 5.8% 7.1%

China 39.2% 37.8% 37.8% 33.0%

Vietnam 8.2% 8.6% 9.2% 10.2%

Market shares in the EU market (by value)

India 6.8% 6.8% 6.1% 7.3%

Bangladesh 9.4% 11.1% 12.7% 13.6%

China 45.5% 43.9% 41.8% 38.5%

Vietnam 2.2% 2.5% 2.7% 2.6%

Source: OTEXA, Eurostat, CRISIL Research

Note: YTD refers to Jan-Mar for EU and Jan-Apr for US

Positive for crude oil producers and refineries; neutral for steel

Crude oil producers and pure-play oil refiners also stand to gain, as their product prices and profitability,

denominated in dollars, are determined by global demand-supply dynamics. Therefore, a weaker rupee will

boost their earnings in rupee terms. The landed cost of steel will also increase, but manufacturers won’t be

able to increase domestic prices commensurately due to the subdued demand environment. Moreover,

coking coal costs would increase, which would keep margins of players under pressure.

Improvement in gross refining margins, along with the

depreciation in the rupee, will buoy earnings of standalone

refiners

6

4.8

6.5

5.45.8

6.4

0

1

2

3

4

5

6

7

2008-09 2009-10 2010-11 2011-12 2012-13E 2013-14P

($ per barrel)

Source: Industry, CRISIL Research

Page 10: Rupee depreciation article july 2013

8

CRISIL Opinion

Domestic HR steel prices have traded below landed cost for

quite a few months over the past 2 years and are likely to

continue to do so in the coming months

30,000

35,000

40,000

45,000

50,000

Apr-

11

Jun

-11

Au

g-1

1

Oc

t-1

1

Dec

-11

Fe

b-1

2

Apr-

12

Jun

-12

Au

g-1

2

Oc

t-1

2

Dec

-12

Fe

b-1

3

Apr-

13

Jun

-13

($/tonne)

Domestic average Landed cost

Source: Industry, CRISIL Research

Indian steel manufacturers import ~70 per cent of their coking

coal requirements. A steeper decline in international coking

coal prices is likely to negate the adverse impact of the weak

rupee, but profitability will be under pressure due to weak

demand and limited pricing flexibility.

11

,299

16

,042

15

,712

15

,887

13

,081

12

,659

13

,496

10

,418

9,9

15

10

,680

9,4

85

9,7

81

-

4,000

8,000

12,000

16,000

20,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E

2011 2012 2013

(Rs/tonne)

Landed cost of imported coking coal

Source: Industry, CRISIL Research

Page 11: Rupee depreciation article july 2013

9

Analytical Contacts:

Mukesh Agarwal Prasad Koparkar Ajay Srinivasan

President, CRISIL Research Senior Director, CRISIL Research Director, CRISIL Research

Email: [email protected] Email: [email protected] Email: [email protected]

Media Contacts:

Priyadarshini Roy Jyoti Parmar Communications and Brand Management Communications and Brand Management

Email: [email protected] Email: [email protected]

Phone: +91 22 3342 1812 Phone: +91 22 3342 1835

Page 12: Rupee depreciation article july 2013

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Page 13: Rupee depreciation article july 2013

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