The appreciation in the US dollar and the subsequent weakness in the euro is set to impact corporate India. In a recent strategy note, BNP Paribas has identified companies that are likely to see effect of the sharp currency move on their financials due to their topline or debt-related exposures.
The foreign broking house says volatility in the currency market will have a bearing on both, the extent of fund flows to Asian markets and earnings of several companies in the region, including Indian.
“With a secular depreciation of the euro being forecast by economists, it is increasingly becoming clear that relative currency movements are going to be a driver of not just flows but also the profitability of individual companies in the medium term,”said BNP in a strategy note on January 22.
Since 2014, the dollar index — a gauge of the US dollar’s strength against a basket of six currencies including the euro — has appreciated over 18% and at 94.53, it currently stands at highest level since September 2003.
The brokerage identifies exporters as companies that are “long USD” and importers or ones with dollar-denominated debt as “short USD”. It notes that among Asian companies, exporters and commodity manufactures primarily fall in the beneficiary bucket. As for India, BNP highlights IT, pharma and auto exporters whose earnings can see substantial benefits of a rise in the value of the dollar.
In the strategy report, analysts Manishi Raychaudhuri and Rajan Jain predict that a 1% appreciation in the exchange rate could expand the earnings per share (EPS) of IT companies by 1.5-3%. While Persistent and Mindtree are likely to benefit more than their peers like Wipro and HCL Tech, larger IT companies, like TCS, are seen least impacted by the move.
The higher greenback is seen helping phrama companies given that 60% to 65% of their sales are exports and the US dollar is the benchmark currency for the sector. “ If the US dollar appreciates 10%, the positive impact on EPS is 3-4%, all else being equal,”added BNP Paribas.
Among auto players, Bajaj Auto and Tata Motors are considered potential gainers with the latter likely to get additional benefit of being a net importer in the euro. With every 1% appreciation in the dollar, Bajaj’s fiscal 2014-15EPS may rise 0.5% while with a similar increase in the dollar against the British Pound and the euro, Tata Motor’s EPS may expand between 1.5% and 2.5%.
As many as 10 companies form a list of 53 Asian companies BNP identified as the US dollar-debt holders and likely to be impacted adversely belong to India. All three ADAG flagship companies are part of the list with Reliance Communications and Reliance Power taking the top two spots. Given that more than 50% of their total debt is dollar denominated, BNP sees a 1% appreciation in the greenback taking off 19.5% and 12.4% of the FY15 net profits of these companies, in that order. Hindalco and Bharti Airtel could witness significant impact on their PAT as nearly half of their total debt ($5.8 billion and $7.5 billion, in that order) are dollar denominated.
BNP Paribas believes the weakness in the euro as a standalone factor is less important for Asian companies as the effects of of a declining euro and depreciating home currencies could cancel out each other. Tata Motors was the only Indian company among the six Asian companies identified by BNP Paribas that have euro-denominated revenues and tend to get impacted adversely.