The unprecedented event in the Asia foreign exchange (Fx) markets last week have led to structural shifts for Asia Fx. We have revised USD-INR forecast at an average rate of 64.5 for FY16 and 64 for FY17. In our diverse industrials coverage, sectors and companies that benefit from rupee weakness are: (i) ports – Adani Ports, Gujarat Pipavav; (ii) BTG (boiler, turbine, generator)/engine exporters—Cummins, Thermax, and BHEL; and (iii) Larsen & Toubro due to exports by L&T Infotech and L&T parent entity.
The net importers adversely impacted by INR depreciation are: (i) power transmission and distribution (T&D) equipment manufacturers—ABB, Siemens, Crompton Greaves; (ii) Inox Wind; (iii) Voltas and Tata Power.
If INR depreciates, then Thermax could benefit the most, while Inox Wind could suffer the most. Note that our earnings take into consideration factors other than INR depreciation impact.
Benefeciaries
Ports: Adani Ports and Gujarat Pipavav Ports have net positive US exposure as 30% and 71% of FY15 revenues of Adani Ports and Gujarat Pipavav in USD.
BTG/engine makers: A 5% USD-INR depreciation would lead to 6%-8% increase in FY17e EPS for Thermax, Cummins, and BHEL due to their high share of exports.
L&T has a positive net USD exposure due to exports. However, foreign currency debt reduces the net benefit to 3.4% of estimated FY17e earnings per share.
Laggards
T&D equipment makers: Key, high-tech components are being imported by ABB, Siemens and Crompton Greaves, resulting in high import content. Thus, they are most vulnerable to USD-INR depreciation. Inox Winds imports two-thirds of its raw materials, including electronic control systems, gearboxes and various other components from suppliers across the globe.
Voltas has a flexible sourcing model for AC for sourcing components and even full products from various vendors, including Chinese partners, resulting in high share of imported raw materials (39% of operating cost of UCP—unitary cooling products—segment). Tata Power’s net USD exposure is negative as the Mundra power plant USD operating cost is offset by USD income from subsidiaries, such as Indonesia coal mines.
Neural impact: Regulated power utilities, Bharat Electronics: The impact of Fx rate fluctuation on regulated power utilities, namely NTPC, NHPC and Power Grid, is negligible as these utilities are entitled are entitled to Fx rate variation pass-through. BEL, a defence PSU, is entitled to pass through on Fx rate fluctuation on purchase of imported components.