Falling rupee's good for Sensex companies

The sharp depreciation in the rupee is bad for the economy at large, but major corporates are likely to actually benefit from it.

To be sure, more than half the earnings of companies that constitute the benchmark Sensex come from globally aligned sectors, which benefit from dollar appreciation on account of exports or having subsidiaries in developed countries.

Sensex earnings are likely to rise nearly 6% if the current weakness in the rupee, which has lost 10.8% versus the dollar since the start of May, persists till the year-end.

Jyotivardhan Jaipuria and Anand Kumar, anlaysts at Bank of America Merrill Lynch said in a recent strategy note that while rupee depreciation has historically been negative for the markets, it has been positive for corporate earnings.

“Though the rupee volatility raises near-term risk for inflation, Sensex EPS rises 3% on a 5% fall in rupee. But this masks the loss in forex loans, which, due to accounting rules, are not routed through profit & loss (P&L) statement,” they wrote in a note last week.

Domestic brokerage Motilal Oswal Securities, too, expects most sectors to be positively impacted, led by technology and metals, though telecom could be negatively impacted.

The Motilal Oswal analysts believe the foreign currency translation loss impact on P&L due to rupee depreciation will be lower due to the accounting option available with the companies to amortise the translation loss over some years, instead of taking the charge upfront in P&L.

Jaipuria and Kumar of Bank of America Merrill Lynch expect sectors like IT (HCL, Infosys) and pharma (Lupin, Cipla), which have high forex revenues, as well as commodity companies such as SAIL and Tata Steel, which benefit from higher landed price, gaining from the rupee fall.

However, the two analysts expect the companies that have raised forex debt for domestic business to be hit as the net worth of these companies get eroded.

The Motilal Oswal duo concurs that debt laden companies could feel the pinch.

“For companies with high D/E (debt to equity) ratio, rupee depreciation will further increase the debt levels which will impact the D/E ratio and credit rating of the companies.”