Invest

Sector review: Export-oriented businesses

FINANCIAL
MONDAY, JUNE 17, 2013

Rupee weak, will gain

IT, pharma, metals and refinery firms are likely to make the most of the turmoil in the domestic currency
AMIT MUDGILL

STOCK WATCH
INFOSYS
LTP: 2,394.95 52-wk H/L: 3,010/2,101.65 EPS: 150.68

Business & background: Infosys is second-largest IT consultancy and software services provider. Prospects: Infosys generated nearly 98 per cent of its revenue from abroad and the recent fall in the rupee is seen positive for the company. The IT firm recently announced salary raise for all of its eligible employees. Experts say Infosys last-12-month attrition remained high at 16 per cent in FY13 against peers TCS and Wipro despite the year was weak for the industry, which may Standalone results have urged the company to hike MAR-13* MAR-12 % wages. Motilal Net sales 9329 8183 14.00 Oswal believes the Expenditure 6698 5477 22.29 wage hike to have a PAT 2305 2759 -16.46 150 basis points impact on operating *For the quarter ended Mar 31 All figures in Rs crore margins of the company. The brokerage said the impact of wage hike could be more than offset by currency-driven tailwind. The company has reported 3.3 per cent rise in year-on-year consolidated profit of Rs 2,394 crore for the March quarter. Valuation: At Fridays close of Rs 2,394.95, the scrip was trading at 15.89 times its EPS for the past four quarters. Amit Mudgill, amitmudgill@mydigitalfc.com
Bloomberg

DR REDDYS LABS
LTP:

2,176.15

52-wk H/L: 2,207.80/1,528 EPS: 74.44

HE rupee hit its all-time low of 58.98 against the dollar past week. While there have been concerns that the rising current account deficit (CAD) would diminish the chances of a further rate cut and would hit interest rate-sensitive sectors, companies from the IT to pharmaceuticals sectors, which stay focused on exports, are expected to see good times ahead as the fall in domestic currency is expected to increase their revenues. Metal companies may also gain from the rupee slide as steel, aluminium and zinc prices are determined on the basis of import parity. The fall in the rupee would translate into higher realisations for metal players. However, since the cost of imported raw materials, such as coal, would also increase due to the rupee depreciation, the benefits would be higher for metal companies less dependent on imported raw materials. Refiners such as Reliance Industries could also fare better as crude price is quoted in dollar terms. Among Indian IT firms, Infosys accounts for 98 per cent of its revenues from the overseas market, while HCL Tech 95 per cent. In the pharma space, Dr Reddys generates 83 per cent from overseas business, Sun Pharma 57.04 per cent and Cipla 54.24 per cent. Among metal firms, Tata Steel sees 73.55 per cent of its revenues from the overseas market, Hindalco 76.23 per cent and Sesa Goa 61.61 per cent. Among refiners, Reliance Industries accounts for 65.16 per cent of its revenues from outside India. Jyothivardhan Jaipuria and Anand Kumar of Bank of America Merill Lynch see HCL Tech and Infosys from the IT space, Lupin and Cipla from the pharma sector, to gain due to high forex revenues while they see metal companies such as SAIL and Tata Steel gain due to higher landed prices. At Friday's exchange rate of 57.52, the rupee is down 6 per cent against the dollar so far for the ongoing quarter. The domestic currency had fallen 1.30 per cent against dollar during the March quarter after appreciating 4.04 per cent in the December quarter. In the last one month, the BSE IT index managed to gain 0.48 per cent

Export-oriented stocks vs BSE 100 index

150 140 130 120 110 100 90 80 70 60 Jun 14, 2012 Jun 14, 2013

Dr Reddy's

141.17
RIL

115.02
BSE 100 idex

114.62
Infosys

100 97.60

Tata Steel

69.38

while the BSE healthcare index fell 1.90 per cent. This is against a 2.72 per cent drop in the BSE Sensex. IT services, metals and oil & gas sectors are likely to benefit the most in a scenario that the rupee averages at 58 in FY14. We see earnings per share (EPS) for most IT companies rising as rupee realisations improve significantly due to transaction gains. However, HCL Tech (17 per cent, in the June quarter) and Infosys (up 13 per cent) should benefit more than TCS (7 per cent) and Wipro (7.7 per cent), as they would likely book the margin gains due to the rupee depreciation, while TCS and Wipro, in line with the recent practice, would likely pass on the margin gains to customers but still report improved revenues, said Abhay Laijawala and Abhishek Saraf of Deustche Bank. Reliance (up 9.7 per cent) and Cairn (8.7 per cent) could also gain as their realisations and margins being dollardenominated would benefit thanks to the fall in the currency, they believe. Alok Kumar Nemani of Nomura India believes that a limited hike in the cost of raw materials for Tata Steel, given that it has captive resources, coupled with benefits in steel realisations, and most of its foreign currency debt hedged, except for $540 million of foreign currency convertible bonds (FCCB), makes it the biggest beneficiary in ferrous metal space. For JSW Steel, he believes that despite higher steel realisations, its rise in raw material cost would be higher

than for Tata Steel and SAIL, given that it imports 100 per cent of its coking coal and purchases nearly 90 per cent of its iron ore requirement from outside. Nevertheless, he estimates that for every Re 1 depreciation would increase earnings before interest, taxes, depreciation and amortisation (Ebitda) of JSW Steel by Rs 250 crore for FY14F. Nemani sees Hindalco gaining as a rise in the increase in raw material costs will be limited given it has captive alumina. For Sesa Sterlite, he however sees $2 billion of foreign currency debt from other businesses. Indian companies route most of the forex debt via balance sheets, thereby limiting the profit and loss (P&L) and mark to market (MTM) impact. Many Indian companies like Tata Steel have foreign subsidiaries which have raised foreign debt to acquire assets. Thus, the impact of the falling rupee would be limited for them. However, companies which have raised forex debt for domestic business would be hit as net worth of these companies will get eroded, Bank of America Merill Lynch experts said in a note. On the pharmaceutical sector, Praful Bohra, senior research analyst at Nirmal Bang Equities, believes that for every 10 per cent depreciation in the rupee, the earnings of Indian pharma companies will go up by 2-5 per cent, with companies like Divis Labs, Cipla, Torrent Pharma, Ipca Labs, Sun Pharma and Lupin benefitting the most. Sun Pharma, Lupin, Dr Reddys,

Cadila, Glenmark earn a large chunk of their revenues from the US (between 3050 per cent) and the current rupee depreciation will positively impact their earnings. On the other hand, some companies that have dollar-denominated debt like Aurobindo, Cadila, Jubilant Life, and Glenmark, will be negatively impacted. Also, given the fact that a number of companies (Cipla, Lupin, Torrent Pharma, Ranbaxy, Dr Reddys) also hedge their export revenues, the positive impact will be partially negated, Bohra said. The performance of IT stocks this calendar are much in line with their fundamentals. HCL Tech and TCS, which kept on delivering in line earnings, have added 22.96 per cent and 15.23 per cent, respectively. Tech Mahindra, Satyam Computer and Infosys have gained 3.59 per cent, 3.37 per cent and 3.30 per cent, respectively. Infosys, which has failed to impress the market with its earnings in the past few quarters, cut losses after Narayana Murthy was reappointed as chairman of the IT bellwether. Many domestic pharma companies also performed well. Sun Pharma, Lupin and IPCA Labs have jumped 29.55 per cent, 27.7 0 per cent and 24.61 per cent, respectively. Dr Reddys Labs and Glenmark Pharma have gained 19.03 per cent and 8.04 per cent, respectively. Patent expiries in the US market are expected to be the next big trigger for pharma firms. Like the rupee, currencies of other emerging market have also fallen against the US dollar in the recent past. However, Bohra doesnt see this overshadowing Pharma companies competitive factor, as the cost of manufacturing drugs in India is amongst the lowest in the world approximately one-third against regulated markets. More than the currency, we would be concerned about the regulatory issues in export countries, he said. The year has so far not been good for metal stocks. The BSE metal index has fallen 28.28 per cent due to weak prices amid lack of demand. Jindal Steel, SAIL, Tata Steel and Sterlite Industries dropped 45.83 per cent, 40.29 per cent, 35.99 per cent and 28.85 per cent, respectively.
amitmudgill @mydigitalfc.com

Business & background: Dr Reddys Laboratories manufactures bulk drugs and formulations. Prospects: Dr Reddys generated over 83 per cent of its FY13 revenues from outside India. The drug maker reported 67 per cent year-on-year rise in consolidated net profit to Rs 571 crore for the March quarter. Experts see the recent rupee fall to favour its earnings. However, there are concerns over its earnings form the US market. The company did not give any guidance for FY14 amid uncertainty in the Standalone results US on account of MAR-13* MAR-12 % delays in regulatory Net sales 2233.3 1765.38 26.51 approvals for new Expenditure 1793.04 1595.7 12.37 products. JPMorgan in a result note said PAT 378.15 211.79 78.55 that while it does *For the quarter ended Mar 31 All figures in Rs crore not rule out potential delays in the US, it believes the product pipeline remains strong. Valuation: At Fridays close of Rs 2,176.50, the scrip was trading at 29.24 times its EPS for the past four quarters. Amit Mudgill, amitmudgill@mydigitalfc.com

Pinaki Paul

TATA STEEL
LTP:

274.15

52-wk H/L: 454.90/264.60

EPS: 56.62

Business & background: Tata Steel is an integrated steel producer. Prospects: Tata Steel saw a consolidated loss of Rs 6,529 crore for the fourth quarter, led by a goodwill write-down of Rs 8,356 crore on account of its operations in Europe and southeast Asia. European operations may continue to face headwinds. ICICI Securities pointed out that the company is witnessing a signifStandalone results icant shift in its business compositMAR-13* MAR-12 % ion wherein notaNet sales 10602.88 9375.91 13.09 ble capacity expanExpenditure 8153.37 6487.82 25.67 sion is being carPAT 1309.21 1560.51 -16.10 ried out in the high *For the quarter ended Mar 31 All figures in Rs crore margin domestic business segment. Tata Steel is among the many metal companies that are likely to witness gains from the fall in the Indian currency as the rise in landed price would increase domestic realisations. Valuation: At Fridays close of Rs 274.15, the scrip was trading at 4.84 times its EPS for the past four quarters. Amit Mudgill, amitmudgill@mydigitalfc.com

RELIANCE INDUSTRIES
LTP:

814

52-WK H/L: 954.80/703.95

EPS: 59.67

ANALYST OUTLOOK

Falling rupee will boost IT, pharma players

VINAY KHATTAR
Edelweiss

NDIAN companies with large forex revenues and profits (IT, pharma, oil & gas upstream) are likely to benefit, while companies with import exposure (aviation, OMCs) are expected to be the losers. IT and pharmaceutical are two big export-centric industries as far as India is concerned. Thus, it is natural for

these two sectors to hog the limelight when the rupee is under pressure. Depreciation in INR is quite positive for the Indian IT industry, as they derive more than 70 per cent of revenues from foreign currency. While the total dollar revenue billing is almost 60 per cent, the net impact depends on the total onsite/offsite efforts, utilisation and other operating costs. As per our calculations, every 1 per cent depreciation in rupee increases the Ebitda mar-

gins by 30-40 bps. Major beneficiaries include HCL Technologies and Infosys, while others like TCS and Wipro would also see some gains, primarily driven by different currency hedging policies. The sharp depreciation in the rupee would have a positive bearing on the earnings of major pharmaceutical companies, given that most of them derive 50-80 per cent of income from exports. We highlight that a 5 per cent depreci-

ation over estimated average realised rate would benefit major pharma stocks at an operational level. Major beneficiaries include Cipla and Alembic, while others like Sun Pharma, Lupin, Divis Labs, Glenmark and Cadila would also see some gains. Upstream oil companies will benefit as the price of crude is quoted in dollar terms. Refiners like RIL, which are focused on exports will also benefit due to the depreciation in rupee..

Business & background: Reliance Industries owns the largest refinery in the world. Prospects: RIL is back in news after one of its KG-D6 partner Niko Resources raised the gas reserves estimate by 100 per cent based on an independent consultant reserve evaluation report. The refiner recently said it will invest $26 billion over the next three years. It reported a 32 per cent year-on-year jump in net profit to Rs 5,589 crore for the Standalone results quarter ended March 31, compared with MAR-13* MAR-12 % Rs 4,236 crore in Net sales 84198 85182 -1.16 year-ago period. Reli76373 78619 -2.86 ance may be posit- Expenditure PAT 5589 4236 31.94 ively impacted by the fall in rupee. Nomura *For the quarter ended Mar 31 All figures in Rs crore India said RIL increased pet-chem prices by 2-10 per cent in June. Polymer prices were increased by 6-10 per cent, and polyester/polyester intermediaries prices by 3-5 per cent. Valuation: At Fridays close of Rs 814, the scrip was trading at 13.64 times its EPS for the past four quarters. Amit Mudgill, amitmudgill@mydigitalfc.com