good article for rupee depriciation

1. CRISIL Insight
July 2013
Rupee depreciation to hurt India Inc

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Last updated: May, 2013.
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CRISIL Insight

3. 1
Rupee depreciation to hurt India Inc
CRISIL Research, India’s largest independent and integrated research house, expects India Inc to be
severely impacted by the rupee’s depreciation against the dollar given the large foreign currency debt on the
books and only partial hedging. Moreover, the rupee’s depreciation will lift input costs across many sectors
amidst weak demand environment as reflected in low double digit topline growth expected in 2013-14. Even
exporters are unlikely to benefit significantly as clients may seek to renegotiate contracts. We expect the
rupee to strengthen from its current levels, but the 2013-14 average will still be 5-8 per cent weaker than the
2012-13 average.
Surge in interest servicing costs for companies with forex debt
Indian companies with foreign debt on their books and without any natural hedge in the form of forex
earnings will be badly hurt by the depreciation of the rupee. This is because the outgo towards interest on
this debt, marked-to-market losses, and rollover of hedged positions will increase. Indian companies have
increasingly been resorting to borrowing abroad in order to take advantage of the lower interest rates on
offer. For companies in the CNX Nifty (excluding banking and financial services), around 40 per cent of debt
is denominated in foreign currency. In total, corporate India had forex debt outstanding of over $200 billion
as of March 2013, of which close to 45 per cent is short-term debt. Moreover, only half their forex exposure is
hedged. Persistent weakness in the rupee and heightened volatility has reduced the benefits of borrowing
overseas.
Increasing input costs to hurt several sectors
From the growth and profitability perspective, sectors that will be negatively impacted by the rupee’s
depreciation include automobiles, auto components, airlines, consumer durables, oil marketing companies,
and fertilisers. The increase in fuel costs will hurt the demand for automobiles, especially small cars, as fuel
alone accounts for close to 25-30 per cent of the ownership cost of a small car in the year of purchase.
Airlines with a high proportion of revenues accruing from domestic operations will also be hurt as 70 per cent
of their operating costs are incurred in dollars, and their ability to pass on any cost increase is limited, given
the sobering impact of price increases on demand. We do not expect diesel prices to increase by more than
Rs 1.50 per litre from the current level; therefore, a weak rupee would increase under-recoveries of oil
marketing companies. We foresee under-recoveries touching Rs 1,050 billion in 2013-14, around 10 per cent
higher than our previous estimate.

4. 2
CRISIL Opinion
Auto sales volumes expected to be remain subdued in 2013-14
as well, as fuel costs and weak economic environment bite
-30%
-20%
-10%
0%
10%
20%
30%
40%
Cars and Uvs LCVs MHCVs TW
2011-12 2012-13 2013-14 (P)
0-2% 2-4% 1-(2)%
6-8%
Source: SIAM, CRISIL Research
EBITDA margins, which touched 5-year lows in 2012-13, are
expected to remain under pressure, as input costs escalate
and demand remains weak
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2008-09 2009-10 2010-11 2011-12 2012-13
Cars and Uvs CV TW
Source: CRISIL Research

5. 3
Airlines may find it difficult to pass on the increase in ATF
costs, as any further fare hikes would adversely hit passenger
traffic
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2008-09 2009-10 2010-11 2011-12 2012-13 Q12013-14 E
Ticket prices (Y-O-Y Change)
Domestic passenger traffic( Y-O-Y Change)
Note: Ticket prices have been estimated by using Spicejet and Jet Airways.
Source: DGCA, CRISIL Research
Under-recoveries of oil marketing companies forecast to
increase 10 per cent from previous estimates
782
1,386
1,602
900-1,000
1,000-1,100
0 500 1000 1500 2000
2010-11
2011-12
2012-13
2013-14 earlier
estimate
2013-14 revised
estimate
(Rs billion)
Source: Industry, CRISIL Research

6. 4
CRISIL Opinion
While international prices of raw materials for complex
fertilisers have softened considerably, rupee depreciation and
limited pricing flexibility would hurt domestic manufacturers
15,000
30,000
45,000
60,000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2011-12 2012-13 2013-14
(Rs / MT)
MOP DAP Phosphoric acid
Source: Fertecon, CRISIL Research
Export-oriented sectors to benefit marginally
Export-oriented companies are generally the biggest beneficiaries of the rupee’s depreciation, but CRISIL
Research believes that the current economic environment globally and renegotiation of contracts by clients
would limit the upside for these companies. Demand growth and ability to compete with other players, rather
than currency movements, are more critical in determining growth and profitability of such companies.
Our view is corroborated by the modest performance of some export-oriented industries in 2012-13, a year in
which the rupee depreciated by 14 per cent against the dollar on a year-on-year (y-o-y) basis. Around 180
listed export-oriented companies (defined as more than 75 per cent of revenues coming from exports),
together accounting for around 12 per cent of India’s total exports, reported a marginal 1-2 per cent growth
in revenues in dollar terms and 60-bps rise in EBITDA margins in 2012-13, despite a weak currency.
Amongst export-oriented sectors, tier-1 IT services companies, which together contribute 65 per cent of the
industry's export revenues, reported a 23 per cent rise in rupee revenues, though dollar revenues grew by
only 10 per cent in 2012-13, thanks to the weak rupee. However, their EBITDA margins remained flat y-o-y
at 24.2 per cent, reflecting subdued IT spending, pressure on billing rates, and lower utilisation levels.
A similar scenario had occurred in 2008-09, when EBITDA margins remained unchanged though the rupee
fell by more than 14 per cent. Buyers of Indian bulk drugs renegotiated contracts at lower rates, resulting in a
slight decline in dollar revenue growth. In the readymade garments (RMG) segment, Indian exporters
continued to lose market share to Bangladesh and Vietnam. Export volumes to the European Union and US
slumped by 16 per cent and 7 per cent respectively in calendar year 2012, far steeper than the overall
decline in imports by these countries.
During the current fiscal, CRISIL Research expects export-oriented sectors to benefit marginally from the
depreciation of the rupee. Due to the pick-up in business momentum and utilisation levels, we expect tier-1

7. 5
IT services companies to report a 50-100 basis points improvement in EBITDA margins in 2013-14.
Formulation and bulk drug exporters are also expected to report a similar improvement in profitability. RMG
exporters may be able to recapture some volumes, as buyers abroad look at diversifying their sourcing base
after the recent collapse of a textile mill in Bangladesh. Moreover, the currencies of other competing
countries such as Bangladesh, Vietnam, and China have remained more or less stable against the dollar
since the beginning of 2013-14.
Indian rupee has depreciated most rapidly against the dollar
since March 2013 till date
-11.9%
-11.5%
-8.1%
-7.4%
-3.8%
-2.4%
-1.2%
0.1%
1.3%
-14.0% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0%
Indian Rupee
Brazil Real
Thailand Baht
Japanese Yen
S Korean Won
Pakistan Rupee
Vietnam Dong
Bangaladesh Taka
Chinese Yuan
Source: OANDA, CRISIL Research
The depreciation in currency helped prop up rupee revenue
growth of IT services companies in 2012-13…
0%
5%
10%
15%
20%
25%
30%
35%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY 2011 FY 2012 FY 2013
USD revenue growth Rupee revenue growth
Source: CRISIL Research

8. 6
CRISIL Opinion
…But EBITDA margins declined, reflecting the dip in business
growth and utilisation levels
21.0%
22.0%
23.0%
24.0%
25.0%
26.0%
27.0%
38.00
43.50
49.00
54.50
60.00
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
Rs/USD EBITDA margins (RHS)
Source: CRISIL Research
RMG export volumes took a beating in 2011 and 2012 as India
operates in the relatively high-value category, but volumes
have stabilised in the initial few months of 2013
7.0
-7.4 -7.2
0.9
-6.5
-8.4
-15.9
-0.4
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
2010 2011 2012 Jan-Apr
2013
2010 2011 2012 Jan-Mar
2013
US EU
(y-o-y growth in
per cent)
Source: OTEXA, Eurostat, CRISIL Research

9. 7
Indian RMG exporters are also gradually regaining market
share
(per cent) 2010 2011 2012 YTD 2013
Market shares in US market (by value)
India 4.4% 4.3% 4.0% 5.0%
Bangladesh 5.5% 5.8% 5.8% 7.1%
China 39.2% 37.8% 37.8% 33.0%
Vietnam 8.2% 8.6% 9.2% 10.2%
Market shares in the EU market (by value)
India 6.8% 6.8% 6.1% 7.3%
Bangladesh 9.4% 11.1% 12.7% 13.6%
China 45.5% 43.9% 41.8% 38.5%
Vietnam 2.2% 2.5% 2.7% 2.6%
Source: OTEXA, Eurostat, CRISIL Research
Note: YTD refers to Jan-Mar for EU and Jan-Apr for US
Positive for crude oil producers and refineries; neutral for steel
Crude oil producers and pure-play oil refiners also stand to gain, as their product prices and profitability,
denominated in dollars, are determined by global demand-supply dynamics. Therefore, a weaker rupee will
boost their earnings in rupee terms. The landed cost of steel will also increase, but manufacturers won’t be
able to increase domestic prices commensurately due to the subdued demand environment. Moreover,
coking coal costs would increase, which would keep margins of players under pressure.
Improvement in gross refining margins, along with the
depreciation in the rupee, will buoy earnings of standalone
refiners
6
4.8
6.5
5.4
5.8
6.4
0
1
2
3
4
5
6
7
2008-09 2009-10 2010-11 2011-12 2012-13E 2013-14P
($ per barrel)
Source: Industry, CRISIL Research

10. 8
CRISIL Opinion
Domestic HR steel prices have traded below landed cost for
quite a few months over the past 2 years and are likely to
continue to do so in the coming months
30,000
35,000
40,000
45,000
50,000
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
($/tonne)
Domestic average Landed cost
Source: Industry, CRISIL Research
Indian steel manufacturers import ~70 per cent of their coking
coal requirements. A steeper decline in international coking
coal prices is likely to negate the adverse impact of the weak
rupee, but profitability will be under pressure due to weak
demand and limited pricing flexibility.
11,299
16,042
15,712
15,887
13,081
12,659
13,496
10,418
9,915
10,680
9,485
9,781
-
4,000
8,000
12,000
16,000
20,000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E
2011 2012 2013
(Rs/tonne)
Landed cost of imported coking coal
Source: Industry, CRISIL Research

11. 9
Analytical Contacts:
Mukesh Agarwal Prasad Koparkar Ajay Srinivasan
President, CRISIL Research Senior Director, CRISIL Research Director, CRISIL Research
Email: mukesh.agarwal@crisil.com Email: prasad.koparkar@crisil.com Email: ajay.srinivasan@crisil.com
Media Contacts:
Priyadarshini Roy Jyoti Parmar
Communications and Brand Management Communications and Brand Management
Email: priyadarshini.roy@crisil.com Email: jyoti.parmar@crisil.com
Phone: +91 22 3342 1812 Phone: +91 22 3342 1835

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