Thursday, May 31, 2012

>RUPEE DEPRECIATION: Net positive for earnings

The sharp depreciation in INR, on balance, is likely to be positive for earnings due to large positive impact on sectors such as Pharma, IT, and Metals, offset by relatively smaller negative impact on sectors like Capital goods, Energy, Media, Telecom and Utilities. At an aggregate level, assuming INR at ~Rs55/USD, this will translate into a ~5% increase each for FY13 and FY14 for Sensex/Nifty.

 INR has depreciated ~25% since late July 2011
INR depreciation in line with other EMs: Although INR has depreciated sharply in the past few months (~25% since July 2011), the depreciation is broadly in sync with that of other EM currencies that also have a current account deficit, as the chart alongside indicates. Thus, the depreciation largely reflects heightened global risk aversion, which is disproportionately impacting all currencies that have a large external gap.

 INR back in fair-value zone on REER basis: The sharp depreciation in INR is largely justified, given the large current account deficit and inflation differentials. However, as of April, on real effective exchange rate (REER) basis, INR has reverted to the FY06 levels and was just 4-5% higher than the FY09-10 levels. Barring any further sharp increase in global risk aversion, there is limited downside to INR from current levels.

■ Within large caps HCL Tech, Wipro, Tata Steel, Hindalco, Cairn will see >10% upgrade to FY13 EPS while Siemens, ABB, HT Media HPCL, IGL will see >10% downgrade to their FY13 EPS

To read report in detail: RUPEE DEPRECIATION