A sharp rupee depreciation against the US dollar will impact the earnings of the automobile manufacturers in the coming quarters and may last up to two years, IIFL said in a note on Wednesday.
On Wednesday, at 09:15 AM,
the rupee was trading at 72.78 a dollar, up 17 paise, from its Tuesday’s close of 72.97. The home currency opened at 72.70 and touched a high and a low of 72.70 and 72.80 a dollar, respectively.
The strength in the rupee was marginal after the partially-convertible currency plunged 46 paise to close at a new record low of 72.97 on Tuesday. The Indian currency had previously hit an all-time low of 72.91 (intraday) on September 12.
Users of global commodities such as lead and rubber would also be negatively impacted by the sharp fall in rupee. However, a fall in the dollar prices of these commodities would provide some relief, the report said.
A change in the lead prices would hurt the battery-makers, as the lead cost is equivalent to 50 percent of the revenue. A sharp fall in the dollar price of lead would imply that the battery makers are well off. In rupee terms, lead prices are about 8 percent lower than the average price in 4QFY18.
According to the IIFL report, these auto companies will be impacted the most: Maruti Suzuki:
The Indo-Japanese car manufacturing company will be negatively impacted in the coming quarters by the sharp depreciation in rupee as against the Japanese Yen, the report said.
Japanese yen has appreciated sharply, up about 5.4 percent from the first quarter of 2018-19 average.
Imports for the company account for nearly 20-22 percent of the total revenues. It has about 4-5 percent direct and about 12 percent indirect imports. As a result, the financial company has cut its FY20-21 EBITDA margin by 50-60 bps, and an earnings per share (EPS) cut of about four percent.
One basis point is a hundredth of a percentage point.
Balkrishna Industries’ export revenue share is at 85 percent of which Europe contributes about 53 percent. The net currency exposure in Euro, for the company is around 40 percent, as RM imports comprise 42-43 percent of US dollar linked revenues.
“As per the FY18 annual report, the total value of hedges (in rupee terms) was around Rs 16.5 billion on Mar 31, 2018, which is equivalent to 36 percent of our FY19 export revenue estimates and about 73 percent of the net exposure. As per management, more than 80 percent of FY19 net exposure is hedged at Rs 81-82. Hence, the full benefit of the recent sharp appreciation in the Euro as against the rupee will flow through only in FY20,” the report said.
Bharat Forge’s export revenue is about 57 percent, out of which 73 percent is US dollar based. As per the company’s FY18 annual report, the total outstanding hedges are equal to Rs 61.3 billion, which is about 172 percent of IIFL’s FY19 export estimates.
Therefore, despite having export contribution, the recent fall in rupee against the greenback will not benefit the company and will negatively impact for the whole of FY19 and a larger part of FY20.
For Bajaj Auto, export revenues are backed by the US dollar and account for about 40 percent of the total revenue. As per the company’s FY18 annual report, the outstanding hedge stand at about Rs 105.1 billion.IIFL expects positive outcome from the rupee depreciation as two-third of these hedging contracts are options which provide some upside potential if the spot rates moves above the contract rate. IIFL, however is skeptical whether the fall in rupee would impact the purchasing power of Bajaj’s export customers.