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Falling rupee translates to rising stock for key sectors

The rupee’s fall to sub 70-per-US dollar levels is likely to impact second quarter earnings in specific sectors and stocks with exporters benefiting while importers face rising costs.
The rupee traded in the range of 68.44 to 70.42 per US dollar so far in the second quarter from July 1 to August 23 as against its much broader range of 64.80 to 69.10 per US dollar during April 1 to June 30 period of the previous quarter. India can capitalise on the sectors which will benefit out of the rupee depreciation — IT and pharma companies which predominantly earn in dollar term although they might not focus purely on exports like textiles, oil and gas, tourism and consumption.
Despite touching historic lows, for the first time foreign portfolio investors have not withdrawn from the Indian equity market in a panic and the equity market is trading at an all-time high.
Dhananjay Sinha, head-institutional research and strategist, Emkay Global Financial Services, said in his outlook for Q2FY19, “Earnings growth boosters are pivoted on the following factors — higher central and state government spending in the run-up to the upcoming elections (boosting consumption in both urban and rural areas); the depreciation of the INR against the USD; enhanced household leverage spending; and pent-up demand after two major economic shocks.”
“Indian equities will have a cascading impact on the broader indices if the tension escalates in Turkey but the macros of the Indian equities look decent. As a result, this correction should be taken as a buying opportunity,” said Foram Parekh, fundamental analyst, Indiabulls Ventures. As the upstream companies tend to sell crude to OMCs like HPCL, BPCL and IOC in dollar terms and crude is also trading above $70 per barrel, companies like ONGC, Oil India and Reliance Industries will tend to benefit out of the depreciating rupee and rising crude prices.
“Many textile companies sell their products directly to the US and North America. We are bullish on the entire textile space due to the falling rupee. Hence, stocks like Welspun India, Trident and Indo Count Industries will tend to benefit on account of the falling rupee,” said Parekh.
IT exports are likely to benefit from the depreciating rupee and improving growth outlook, according to analysts. Since most of the companies in the IT sector deal with export of IT services, the IT sector will be the primary beneficiary of the depreciating rupee, according to Parekh. “At the same time rising input costs, especially of imported raw materials, are negative for aviation and pharma companies,” said a report by ICICI Securities.
Pharma companies with high export exposure benefited from rupee depreciation. However, higher input costs impacted the gross margins due to an increase in prices of APIs imported from China, said the report.
In the tourism sector, the rupee depreciation would help inbound travel as foreign travellers get more rupees to spend on their arrival in the country while Indians travelling abroad have been hit. India Tourism Development Corporation (ITDC), Tourism Finance Corporation of India, Thomas Cook and Cox & Kings have seen higher volatility in their stocks price during the period July 1 to August 21, but do not reflect decisive uptrend so far – rather their performance has been mixed.
For travel support companies like Thomas Cook and Cox & King, rupee depreciation will be rather negative with fewer Indians travelling abroad. But, the rupee-dollar movement is a technical aspect as travel plans do not change and it will not impact earnings much, said an analyst. “The rupee depreciated 10 per cent in a month on account of the lira. But for the first time in its history, the Indian rupee has depreciated to lifetime lows and at the same time the Indian equity market is trading at its lifetime highs,” Parekh said.
However, Parekh added, “The depreciating currency will impact the Indian economy adversely as India is an importing country. The falling rupee will result in an increase in its oil imports which can widen our fiscal and current account deficit.”