Re Positive Riding The Currency Slide

For India Inc, things couldn’t get any worse. It is already battling a demand slowdown amid macro headwinds and a policy paralysis. And now, the rupee’s plunge has left it with no place to hide. But not all are feeling the pain. In fact, for exporters it could turn out to be a windfall. ET Intelligence Group digs out a few of these gainers that may not be on the investors’ radar

    The rupee kept making record lows every day of the last week. This is a matter of worry for the economy, companies as well as consumers. A study of the latest annual earnings data of top BSE 500 companies by the ET Intelligence Group reveals the impact of the weak rupee on India Inc’s import and exports bill. On the net level, a significantly weakened rupee is bound to adversely impact the country’s commerce. India Inc earns 20% of its standalone revenues from exports. However, it spends over 36% of its revenues on imports. A 8.9% depreciation in the rupee against the dollar and similar movement against other major currencies of the world since the beginning of the current quarter is likely to impact the companies’ net forex bill. This does not include the impact on the profits of mark-to-market losses on forex contracts. While each company would be impacted to the extent of the hedging undertaken by it, it is difficult for companies to hedge its entire forex exposure — especially when the currency has entered uncharted territory. With India importing more than 84% of its crude oil requirement and more than one-fourth of its natural gas requirement, the petroleum industry remains the single largest importer for the country. India imported 172.11 million tonne of crude oil in FY12 out of the 204.8 million tonne processed by domestic refiners. Reliance Industries leads the pack in our study — being the top foreign exchange earner among Indian companies and one with the highest import spending also. In FY12, the company had total forex earnings of 1.98 lakh crore — constituting 58% of its total standalone revenues. Its imports bill stood at 2.64 lakh crore, eating up 77.7% of total revenues. As a result, it enjoys natural hedging. Incidentally, oil companies dominate the list of companies’ with highest forex spends. However, the situation is not all bad for India Inc. The depreciated rupee increases the competitiveness of exports. Companies from traditional export-oriented sectors like IT, oil & gas, jewellery and pharmaceuticals dominate the list of top Indian exporters. TCS, the secondlargest exporter of India Inc earns 98% of its revenues amounting to 38,098 crore from exports. For such exporters, remaining unhedged would provide the maximum advantage from the currency depreciation. However, that is not the case. Even an exporter’s gain is limited by the forward contracts that it would have entered into to protect against currency volatility. Moreover, when one takes up hedging in a volatile market scenario, the cost of hedging is likely to be high. The Street is likely to have factored in the increase in realisations for most of these exporting companies on account of the rupee’s slide during the current quarter. ETIG brings you a slew of small and mid-sized companies that earn a large chunk of their revenues through export of goods and services. They are from less obvious sectors like food processing, garments, hospitality, marine vessels, minerals, auto ancillaries, coffee and chemicals. 

Global Offshore Mumbai-based Global Offshore is in the business of chartering out its fleet of 11 offshore vessels to the petroleum exploration industry. In line with the global practice, charter rates for the vessels are denominated in US dollars, and that means Global Offshore has lots to gain from a weaker rupee. Two of Global Offshore’s vessels recently began contracts with Petrobras in Brazil at daily rates of $24,000 and $30,000, which are substantially higher than what the rest of its fleet gets. As a result its March 2012 quarter net profit jumped more than 7-fold to 11.1 crore. The company is awaiting delivery of an additional vessel in mid-2012 at a cost of $48 million. Five of its existing assets will complete their ongoing contracts between now and November 2012. Any rise in rates it is able to secure for new contracts will be a big positive.
The market for offshore support vessels remains oversupplied and crowded particularly with more and more traditional shipping companies viewing this business as more attractive than their normal work. This has resulted in the charter rates staying sluggish, and they may remain so in the foreseeable future. 

ADF Foods Mumbai-based ADF Foods is a small-sized fast moving consumer goods company engaged in the manufacture of packaged ethnic Indian food. The company earns over 95% of its revenues from overseas markets like the Middle East, the US, Europe and Australia. The company’s bottom line growth has been subdued since its acquisition of US-based Elena Foods. Though net sales increased by 33% over the last four trailing quarters, net profit dropped by 23.8%. High expenditure and forex losses adversely impacted the bottom line in the December quarter. Integrating the business of the US-based foods company is likely to remain a challenge. Besides, an increase in input and packaging costs, food inflation and exchange rate fluctuations are likely to impact the company adversely. 

Cochin Minerals & Rutile Kerala-based Cochin Minerals & Rutile is a 100% export oriented unit (EOU) producing synthetic rutile, ferric and ferrous chlorides and iron hydroxide from naturally found mineral deposits on Kerala’s beaches. Its key product synthetic rutile, which accounts for over 92% of its turnover, is an important source of titanium dioxide — a white pigment, used in paints as well as personal care products such as sunscreen lotions. Being an export-oriented unit, Cochin Minerals is a natural beneficiary of the depreciating rupee. The company’s net profit for FY12 jumped almost 12-fold to 57.1 crore as prices of rutile improved. At the end of September 2011 the company had a debt-equity ratio of 0.4. The company is currently trading at a P/E of 3.7 and has announced a dividend of 12 per share, which gives a 4.4% yield.
The company had been facing a shortage of ilmenite — the raw ore needed in the production of synthetic rutile. A steady supply of ilmenite will be key to the company’s future growth. 

Vikas WSP Rajasthan-based Vikas WSP is India’s leading guar gum powder (GGP) manufacturer supplying to varied sectors like oil drilling and fracturing, food processing, textile printing and paper making. India is the dominant producer of guar gum in the world, accounting for 80-90% of the total global production. The company is in an expansion mode and plans to double its capacity on back of rising demand from the fracking industry that works at extracting gas trapped in shale formations. Though the company’s revenues have increased steadily over the quarters, its realisations have not risen in tandem. Higher cost of raw material — guar gum —has impacted the company’s bottom line. The prices of guar gum have not declined much despite the futures trading ban. The stock price of Vikas WSP has rallied — tracking the rising prices of guar gum. The small-cap stock without any listed peer is trading at over seven times its earnings. 

Technocraft Industries Technocraft Industries is a diversified company with a ‘three-star export house’ government recognition. It earns almost 70% of its revenue through exports. It is the second largest producer of drum closures globally. This division contributes about 35% to the company’s revenue. Apart from this, it also makes welded steel tubes and scaffoldings as well as cotton yarn.
After making a loss of 7.3 crore in the June 2011 quarter, the company’s performance has consistently improved. During the December 2011 quarter, its profit almost doubled compared with the year-ago period to 11.2 crore and its operating profit margin rose from 17.2% to 21.6%. 

AVT Natural Products Promoted by Kerala-based AV Thomas Group, AVT Natural Products manufactures and exports marigold oleoresins, spice oleoresins, essential oils and value added teas to countries outside India.
The company has been performing remarkably well since the last four quarters ended December 2011. During this period, net sales have doubled and net profit has increased five-fold. Its overseas subsidiaries in China and Singapore have been doing well due to an increase in growing areas, higher flower output and better marigold oleoresin prices. At the same time, the company is battling challenges like sustained inflation in food prices, poor labour availability and escalating labour costs in the marigold growing areas. The company’s stock is trading at a price to earnings multiple of 5.6. 

CCL Products Guntur-based CCL Products is an export-oriented unit, with the ability to import green coffee into India and export the same - free of all duties. CCL has an established presence in the international markets in the traditional spraydried instant coffee segment and has made a successful entry in the freeze-dried coffee intending to gain share in the promising market segment of liquid coffee. The company’s key markets in Europe, CIS and Far East have posted a good recovery after the financial downturn. Its newly-formed subsidiary in Vietnam is expected to explore and expand in new markets. For the four quarters ended March 2012, the company’s net sales were up 38% while its net profit rose 40% over the previous year. 

Automobile Corporation of Goa Automobile Corporation of Goa (ACGL), manufactures sheet metal components, assemblies and bus coaches. The company is jointly promoted by Tata Motors and EDC Limited (formerly known as Economic Development Corporation of Goa, Daman & Diu). It is a major supplier of pressings and assemblies to Tata Motors, a large proportion of which is exported. During the last fiscal, sales from its bus division, which accounts for nearly three-fourths of its revenue, declined 12%. This was mainly on account of shrinkage of volumes from the Gulf countries — the company’s traditional markets — as it is losing out to more competitive manufacturers in other countries. To compensate for this, the company is increasing its focus on the domestic market, where volumes grew 50% during the last fiscal. It is still going to gain from the rupee depreciation to the extent of its exports. 

Kitex Garments Kitex Garments is primarily a manufacturer of fabrics and garments, which contribute 80% of its revenues. The company derives 67% of its revenues in foreign exchange, indicating heavy dependence on overseas markets. In the last five years, the company’s operating profit and net profit margin have demonstrated a linear growth. In the last five years, the company’s operating profit margin grew to 21.8% in FY12 from 17.43% in FY08. Also, its net profit margin grew to 9.15% in FY12 from 5.05% in FY08.
The appreciation of the dollar against the rupee would benefit the company largely. The June quarter would be reasonably good considering the cost advantage factor for Indian textile exporters. On the valuation front, the company is trading at a price to earnings ratio of 9.5 times. This is a bit expensive when compared with its peer Alok Industries, which is trading at a price to earnings ratio of 3 times. 

Asian Hotels West The Mumbai-based five-star hotel is known for the Hyatt brand. In FY11, over 60% of the company’s revenues was in foreign exchange, indicating high dependence on arrival of foreign tourists. The advantage of being present in a major metro ensures a constant flow of foreigners — leisure and business travellers. Having a single property and a powerful brand in the form of Hyatt Regency near the Mumbai airport, the company has maintained its operating profit margin of 30% in the last four fiscals, indicating the benefits of its strategic location. Seasonally, the first quarter of the fiscal is a weak quarter for the hospitality industry in India. As a result, the June 2012 quarter would be a subdued one for the company. The rupee’s slide is likely to cushion this seasonality impact. On the valuation front, the company is trading at a price to earnings ratio of 8 times. This is better than its peers such as Royal Orchid Hotel and Taj GVK Hotels & Resorts, which are trading at a price to earnings ratio of 22 and 12 times, respectively. 

Balkrishna Industries Balkrishna Industries is one of the leading players in off-the-road tyres. It mainly caters to tyres for tractors, trailers and earthmovers. The company is in the process of doubling its capacity to 230,000 metric tonne per annum (MTPA), which is expected to be completed by FY13. Balkrishna Industries receives nearly 80% of its revenues from the replacement market where it fetches an operating margin of around 18%.
The company’s revenues have been growing at a CAGR of 30% since the last five years. Despite an aggressive capacity expansion, the company’s debt is at comfortable levels. As of September 2011, its debt-to-equity ratio was 1.6. Since the company derives 90% of its revenues from exports, it stands to benefit immensely from the depreciation in the rupee. However, Europe, its primary market, is currently reeling from a slowdown. Hence its volumes would be under pressure in the near term. At the current price of 263, the stock is trading at a P/E of 10.4. Due to softening rubber prices, the stock has grown by over 52% in last six months. 

Camlin Fine Sciences Mumbai-based Camlin Fine Sciences is the world’s largest integrated supplier of food antioxidants TBHQ and BHA. Antioxidants are used as preservatives in edible oils and processed foods. The company also makes artificial sweetener sucralose and a few bulk drugs needed by the pharma industry. Since a majority of the company’s products get exported, it is a major gainer from the rupee’s depreciation. Camlin’s FY12 consolidated profits fell 47% to 3.9 crore, while its sales nearly doubled to 335.2 crore. The company is trading at 28.3 times its consolidated net profit for FY12, which is on the higher side. Losses in subsidiaries, a high debt-to-equity ratio of 2.3 apart from managing the competition and volatility in raw material costs remain the main concerns for the company.