EVERY DARK CLOUD HAS A SILVER LINING

DATE:-5 MAY 2007.

Indian rupee is continuing its rally against US$ and is at its 9 year high of Rs.40.60. It has appreciated more than 8% since 2007. The effect of appreciation in rupee can be seen in terms of lower export earnings and affecting the profitability and margins of companies heavy reliant on exports, and it also translates into a lower sales. DSP estimates a 5% rise in Rupee translates into 3.3% hit in revenues on export earnings.
There is an old cliché that ‘every dark cloud has a silver lining’. The same cliché holds true here as well. The companies heavily reliant on foreign borrowings and which have increasing resorted to overseas borrowing and have taken route of ECB, FCCBs will benefit from this strong rally against US$. Companies such as Reliance Communications, Sun Pharma, Ranbaxy, and Bharat Forge as these companies have to make repayments of principal and interest payments in appreciated rupee. This will in turn result into a lower liability and thus boost the earnings, OPM. The rising rupee will help in reducing our import bill also , this will reduce cost for crude oil translating into a higher profits for oil refining companies and PSU like IOC, HPCL, BPCL and refinery giant Reliance Industries but it will hit export earnings of RIL as well. Strong rupee also means negative factor for global commodities and software companies. Commodity producing companies like Hindalco, RIL, Tatas and others may take a hit on profitability. Even software companies like Infosys, HCL, and Wipro will suffer. But software companies have taken huge exposures in forex market to hedge against rising rupee. Moreover software companies like Infosys and TCS have increased their exposure to non US territories and believe increased turnover will help in reducing impact of stronger rupee. Even software companies believe once the inflation is brought under control, RBI will step into the forex market to prevent rupee from rising further and prevent exporters from being hit. So once the monsoon sets in and the supply side measures start showing results inflation will tend to decline and will also ease problems for exporters.
Thus the market is totally awaiting the good news and high agricultural produce and low inflation figures, which would give a green signal to RBI to step into the market to stop rupee rally northwards and come to the rescue of exporters.