At the beginning of the year, the value of one US dollar was 74. Today is the same 78. That means for every dollar you spend; you must pay 4 more.
This sharp move is due to several factors such as geopolitical tensions, rising inflation, and rising crude oil prices,
After a decade of historically low interest rates and loose monetary policy, global central banks, including the US Federal Reserve, have raised interest rates.
The move marks the end of accommodative policies, which have had an impact on economies around the world.
As US interest rates rise, investors everywhere flock to invest in safe-haven dollars. This increased demand boosts the value of the dollar, thereby weakening the rupee.
A weak currency is usually not good for a country. Even more so in a country like India, which is heavily dependent on oil imports.
However, on the other hand, a weak rupee works well for exporters. As each dollar earned adds more to the revenue of the rupee resulting in higher profits.
So, keeping this in mind, we identify the five stocks that benefit the most from a weak rupee.
#1 Infosys
First on our list is Information Technology (IT) major, Infosys.
With over 95% of its total revenue in foreign exchange, the company exports software services and products. 1.18 tons.
While North America makes up 63% of its business, Europe accounts for over 24% of its total revenue.
The company’s total revenue exposure in foreign currencies is greater than its total expense exposure.
While 95% of its revenue is in foreign currency, only 63% of its total expenditure is in foreign currency. This disparity means that a weakening rupee will raise 95% of its revenue and only 63% of its expenditure. All this will boost its profitability.
In addition, the company’s foreign currency net financial asset exposure is also 123 bn.
Now it is a good sign for the company when rupee is falling. A weak domestic currency enhances its net asset position in rupee terms. With this speed, the balance sheet of the company will be further strengthened.
Infosys is the third largest IT vendor in India and has a total workforce of over 240,000. The insurance and financial services segment (32% of total revenue) accounts for the largest share in the industry, followed by retail (16%), and communications (13%).
#2 Tata Consultancy Services
Next on our list is Tata Consultancy Services, India’s largest IT-services exporter by revenue. The company has more than 590,000 employees.
More than 80% of its revenue is in foreign currencies. North America is its largest business segment with over 50% of total revenue, followed by the United Kingdom at 16% and Europe at 15%.
The financial-services segment accounted for 39% of sales, with retail and communications segments accounting for 15% each.
Like Infosys, the company’s total revenues also exceed its total expenses in foreign currency. While 80% of its revenue is in foreign currency, only 45% of its total expenditure is in foreign currency.
This disparity means that a weaker rupee would increase his revenue by 80%, but it would affect only 45% of his expenses. All this will further expand its profits.
The company has stated that a 10% rise or fall in the currency will increase or decrease the Group’s profit before taxes 6.3 billion (1.6% of the total profit) for the fiscal year 2022.
But unlike Infosys, the net liability of the company is foreign exchange exposure. 73 billion
Therefore, a weaker domestic currency will increase its net liability position in rupee terms. Ideally, this should weaken the company’s balance sheet. However, the company has a pristine balance sheet, capable of absorbing any changes.
#3 Sun Pharma
Third on our list is Sun Pharma, India’s largest pharma company. 67% of the company’s revenue ( 205 bn) comes from international markets.
Now it is a good sign for the company when rupee is depreciating.
The company serves more than 100 markets worldwide. With 30% of the revenue share, the US dominates the business mix, followed by emerging markets (18%) and the rest of the world (15%).
In addition, the company’s foreign currency net financial asset exposure is also 3 billion
The net financial asset position bodes well for the company in a scenario where the rupee is depreciating. A weakening of the rupee will increase its net asset position in rupee terms. All of which enhances the strength of the company’s balance sheet.
Apart from dominating the Indian market with an 8% share, Sun Pharma is also a strong player in the US pharmaceutical market.
The company derives the majority of its revenue from generic drugs that it sells through its subsidiary, Taro.
#4 Bharat Forge
Fourth on our list is Bharat Forge, India’s largest forging company.
More than 31% of its total revenue comes from exports ( 19.7 bn). The company serves North America (USA and Mexico), South America (Brazil), Europe and Asia Pacific.
The US market dominates the revenue mix with a 42% share. The European market contributes 15% to the total revenue.
The company exports directly to automobile OEMs in the global commercial vehicle markets (chassis and engine components) and passenger car markets (engine and suspension components).
Apart from the revenue exposure, the company has borrowed heavily in foreign currency. Foreign debt accounts for 87 percent of its total debt. Therefore, a depreciation in the rupee will accelerate repayment and interest payments. Usually this affects profitability. However, since the company earns in the same currency, it can set off a portion of the liability.
The company says that a rise or fall of US$1 in the US dollar will almost increase or decrease the company’s profit before tax. 137 m
Bharat Forge is a leading supplier of forged and machined components to vehicle manufacturers and industrial companies globally.
In the domestic auto market, they focus on commercial vehicles and utility vehicles. His client list includes major automobile companies like Tata Motors and Ashok Leyland.
#5 Bajaj Auto
Last on our list is Bajaj Auto, the world’s third largest motorcycle manufacturer.
The company derives 55 per cent of its volume from exports. In terms of value, this amount is 120 billion, contributing more than 40% to the company’s total revenue.
Bajaj Auto is the largest three wheeler and motorcycle exporter in the country. It serves more than 79 countries spread across Africa, Latin America, South Asia and the Middle East.
This makes its revenue stream vulnerable to any foreign currency fluctuations.
However, being an exporter, the company can get the benefit of rupee depreciation. While a substantial portion (40%) of its total revenue is in foreign currencies, 3% of its total expenditure is in foreign currency.
This difference means that a weaker rupee would increase its revenue by 40%, but it would increase its profits by only 3% of its expenses.
Bajaj Auto has a 12% market share in two wheelers (19% in motorcycles) in India.
The company has a strong franchise in premium motorcycles (33%). However, it is relatively weak in commuter motorcycles.
Its rivals are Hero, Honda and TVS in the two wheeler segment and Piaggio and M&M in the three wheeler segment.[SP3]
Recently the company announced a share buyback program for Not more than 25 billion from the open market 4,600 per equity share.
in conclusion
A depreciating currency augurs well for large exporters.
However, a fall or rise in the rupee has a short-term effect. Any effect, big or small, is usually only for a limited period of time. In the long term, the effect wears off.
Therefore, before acting on a change in currency, check to see the duration and size of the impact on companies.
Happy investment!
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from equitymaster.com