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5 stocks that stand to gain big from a weakening rupee
As the rupee depreciates, these Indian companies stand to benefit the most.
The value of the Indian rupee with respect to the US dollar has fallen significantly in 2022. The primary reason for this has been the strength of the US dollar.At the beginning of the year, one US dollar was worth ₹74. Today, the same is worth ₹78. This means for every dollar you spend; you will have to pay ₹4 more. This sharp move is attributable to numerous factors such as geopolitical tensions, rising inflation, and rising crude oil prices. After a decade of historically low-interest rates and loose monetary policy, global central banks, including the US Federal Reserve, have hiked interest rates. This move signals the end of accommodative policies, whose impact has trickled down to economies across the globe.
As US interest rates rise, investors everywhere, flock to invest in the safe-haven dollar. This increased demand boosts the value of the dollar, weakening the rupee.A weak currency usually does not bode well for a country. More so in a country like India, which is heavily dependent on oil imports. However, on the flip side, a weakening rupee works well for exporters. As every dollar earned adds more to the rupee revenue resulting in higher profits. So, with this in mind, we identify five stocks that stand to benefit the most from a weakening rupee.
First on our list is the Information Technology (IT) major, Infosys. With over 95% of its total revenues in foreign currency, the company exports software services and products worth ₹1.18 tn. While North America forms 63% of its business, Europe accounts for over 24% of the total revenues.The company’s total revenue exposure to foreign currencies exceeds its total expenses exposure. While 95% of the revenues are in foreign currency, only 63% of its total expenses are in foreign currency. This disparity means that a weakening rupee will increase 95% of its revenues and only 63% of its expenses. All of which will boost its profitability.Apart from this, the company also has a foreign currency net financial asset exposure of over ₹123 bn. Now this bodes well for the company when the rupee is falling. A weakening home currency increases its net asset position in rupee terms. This boost will further be strengthening the company’s balance sheet.Infosys is India’s third-largest IT vendor boasting a total employee strength of over 240,000. The insurance and financial services (32% of the total revenues) segment commands the biggest share in the industry vertical, followed by retail (16%), and communications (13%).
#2 Tata Consultancy Services
Next on our list is Tata Consultancy Services, India’s largest IT-services exporter by revenue. The company has an employee strength of over 590,000 employees.Over 80% of its revenues are in foreign currencies. North America is its largest business segment with more than 50% of the total revenues, followed by United Kingdom at 16% and Europe at 15%. The financial-services segment accounts for 39% of sales, with retail and communication segments accounting for 15% each.Much like Infosys, the company’s total revenue also exceeds its total expenses in foreign currency. While 80% of the revenues are in foreign currency, only 45% of its total expenses are in foreign currency. This disparity implies that while the weakening rupee will boost 80% of its revenues, it will only affect 45% of its expenses. All of which will further expand its profits.The company has stated that a 10% jump or fall in the currency will increase or decrease the group’s profit before taxes by ₹6.3 bn (1.6% of the total profits) for the financial year 2022. But unlike Infosys, the company has a net liability foreign currency exposure of ₹73 bn. Therefore, a weakening home currency will increase its net liability position in rupee terms. Ideally this should weaken the company’s balance sheet. However, the company enjoys a pristine balance sheet, capable of absorbing any changes.
#3 Sun Pharma
Third on our list is India’s largest pharma company, Sun Pharma. The company’s 67% of the revenue ( ₹205 bn) comes from international markets. Now this bodes well for the company when the rupee is depreciating.The company serves over 100 markets across the world. With 30% of the revenue share, the US business dominates the mix, followed by the emerging markets (18%), and the rest of the world (15%).
Apart from this, the company also has a foreign currency net financial asset exposure of over ₹3 bn. The net financial asset position bodes well for the company in a scenario where the rupee is falling. A weakening rupee will increase its net asset position in rupee terms. All of which enhances the company’s balance sheet strength.Other than dominating the Indian market with an 8% share, Sun Pharma is a strong player in the US drug market as well.The company derives the majority of its revenue from the generic drugs it sells through its subsidiary Taro.
#4 Bharat Forge
Fourth on our list is India’s largest forgings company, Bharat Forge. Over 31% of its total revenues comes from exports ( ₹19.7 bn). The company serves North America (US and Mexico), South America (Brazil), Europe, and the Asia Pacific. The US market dominates the revenue mix with a 42% share. The European market contributes 15% to the total revenues.The company exports directly to automobile OEMs in the global commercial vehicle markets (chassis and engine components) and passenger car markets (engine and suspension components).
Apart from the revenue exposure, the company has borrowed heavily in foreign currency. 87% of its total debt is foreign debt. Therefore, a depreciating rupee will drive up repayments and interest payments. Usually this affects the profitability. However, since the company earns in the same currency, it can set off a part of the liability.The company states that a US$ 1 jump or fall in the US dollar will increase or decrease the company’s profit before taxes by approximately ₹137 m.Bharat Forge is a major supplier of forged and machined components to automakers and industrial companies globally. In the domestic auto market, they focus on commercial vehicles and utility vehicles. Their clients list includes automobile majors like Tata Motors and Ashok Leyland.
#5 Bajaj Auto
Last on our list is the world’s third-largest motorcycle manufacturer, Bajaj Auto. The company derives 55% of its volumes from exports. In value terms, it amounts to ₹120 bn, contributing to over 40% of the company’s total revenues.
Bajaj Auto is the largest three-wheeler and motorcycle exporter in the country. It serves over 79 countries spanning Africa, Latin America, South Asia, and the Middle East. This makes its revenue stream vulnerable to any foreign currency fluctuations. However, being an exporter the company stands to benefit from a depreciating rupee. While a large chunk (40%) of its total revenues is in foreign currencies, a measly 3% of its total expenses are in foreign currency.
This difference implies that while the weakening rupee will boost 40% of its revenues, it will increase only 3% of its expenses, boosting its profitability. Bajaj Auto enjoys a 12% market share in 2-wheelers (19% in motorcycles) in India. The company has a strong franchise in premium motorcycles (33% share). However, it is relatively weaker in commuter motorcycles. Its competitors are Hero, Honda and TVS in the 2-wheeler segment and Piaggio and M&M in the 3-wheeler segment.[SP3] Recently the company announced a share buyback programme of up to ₹25 bn from the open market at a price not exceeding ₹4,600 per equity share.
A depreciating currency bodes well for large exporters. However, the fall or rise in the rupee tends to have a short-term effect. Any kind of impact, large or small, is usually for a limited duration only. Over the longer term, the impact fades away. So, before you act on a change in the currency, check to see the duration and the size of the impact on the companies.
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