Margin Sensitivity Of BSE 500 Corporates To Forex Fluctuations Has Shown A Rising Trend

In last five years ending FY13, Indian corporate (excluding banking and financial services) has witnessed a rising level of dollarization of the income statements and balance sheets, says a report by India Ratings & Research (Ind-Ra).  The foreign currency (FC) revenue as share of total revenue has increased to 20.1% at the end of FY13 against 17.1% at the end of FY07. Similarly, FC expenditure as share of total expenditure has increased from 38.6% (FY07) to 41.8% at the end of FY13. Therefore, the largest corporates on aggregate basis had more FC outflow than inflows. 

Over half of these corporates have operating structures which make them net FC spenders. On an average, these FC spenders are expected to suffer operating margin deterioration of 1.3% in EBITDA (in INR terms) for every 1% depreciation in the Indian rupee against the US dollar. However, slightly less than half of the BSE 500 corporates are net FC earners and they are estimated to enjoy a 1.6% increase in EBITDA margins (in INR terms) for every 1% INR depreciation.

Although, on aggregate basis depreciation in rupee will impact negatively to most of the corporates, there are some sectors that are positively impacted by the depreciation in the INR against USD. The study rank orders the sectors in terms of their positive and negative sensitivity to currency volatility. Positive sensitivity in this study refers to improvement in operating margin (in INR terms) due to rupee depreciation, while negative sensitivity refers to deterioration in operating margin due to rupee depreciation. However, during rupee appreciation the direction of the impact reverses in these two categories. 

The two sectors with the highest positive sensitivity to rupee depreciation are information technology (IT) and pharmaceuticals. For every 1% rupee depreciation on a sustained basis, the median expansion of EBITDA (in INR terms) for IT companies has been in the range of 2.7% to 2.9% while for the pharmaceutical sector it has been 1.2%-1.5% over FY12-FY13. 

Consumer durables has exhibited the highest negative sensitivity in the range of 1.2% to 2% in case of a 1% INR depreciation, due to major FC outflows on imports of electrical components. Other corporates in sectors such as fertilisers, chemicals, and automotive suppliers have displayed a negative sensitivity change to rupee depreciation, with their EBITDA getting affected to the extent of 0.5% to 1.4% in FY13 for 1% of INR depreciation. However, the margins of these sectors would benefit the most in case the rupee appreciates. 

Further, Ind-Ra has identified and listed the top companies most sensitive to rupee depreciation and rupee appreciation within the BSE 500 universe. 

Top 5 corporates positively affected by rupee appreciation are as follows:

Mangalore Refinery & Petrochemicals 

Hindustan Petroleum Corporation 

Petronet LNG 

HCL Infosystems 

Indian Oil Corporation 

Top 5 corporates positively affected by rupee depreciation are as follows:

Tata Elxsi 

Praj Industries 

Polaris Financial Technology 

Mindtree 

Mphasis