Weak Indian Rupee – Case of Win Some, Lose Some

Published on 26 Oct, 2015

Indian Rupee - Investment Research

Since the end of the June quarter, Rupee has depreciated by c.1.9% against Dollar and c.5.0% vs. Euro. Several export-oriented sectors are gaining majorly from this weakness. Chief among them is the Indian IT Services domain. We believe the IT sector with net exports of 40% to 50% will benefit the most, because generally 1% depreciation in Rupee adds c.20-50bps to EBITDA margins that translate to c.2% increase in EPS.

Impact on Operating Margins against USD

Impact on Operating Margins against USD

Rupee vs USD and EURO June to Sept'15

Rupee vs USD and EURO June to Sept'15

While the INR depreciation has come as a boon to the Indian IT sector in the near term, unstable economic growth in emerging markets (specifically China) and the world (largely the US and the Europe) and depreciation of local currencies against USD in recent months could weigh on the revenue growth of Global 2000 companies - the important customer base of Indian IT services providers.

Having said that, weak Rupee may spell trouble on the other hand for importers and organizations with foreign currency loans. Several industries, such as power that relies on imported fuel, aviation that has a substantial share of its expenses in dollars, and auto component that imports raw materials are all negatively impacted by the weak Rupee. Moreover, firms with large dollar-denominated debts are extremely vulnerable to the weakening currency. We are also seeing high vulnerability in the telecom (equipment imports and dollar debt), metals (high dollar debt), and pockets of Infrastructure (power and ports) sectors.


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