The rupee depreciation year-to-date and in last one month was so sharp that net importers of commodities are likely to hit badly as they have to shell out more money to buy their products.
Rupee depreciation is likely to hit badly net importers of commodities as they have pay more to buy raw material or finished products. On the contrary, exporters will definitely be major beneficiaries.
More the exposure to imports, severe the impact of rupee fall. One of the sectors that may be impacted is chemicals and agrochemicals, but IIFL feels the impact will not be same for all. While exporters can pass on to customers the cost advantage of rupee fall, in case of importers which can't pass on import cost, the pressure can likely go beyond FY19.
The research house said FY19 earnings are likely to be clouded by hedging losses and debt revaluation, so it focuses on earnings for FY20, by when the recurring impact on earnings should become more visible.
According to the brokerage, Deepak Nitrite (DNL), UPL and Atul are likely to be among the leading beneficiaries. It expects Aarti, SRF, Navin Fluorine, Rallis and Tata Chemicals to record more modest benefits while Bayer, Coromandel and GSFC – all net importers – may face some near-term challenges.
It feels INR depreciation will impact not only: 1) ‘core’ trade earnings (i.e., those arising from exports and imports), but also lead to 2) hedging gains/losses, 3) revaluation of foreign currency borrowings, and 4) revaluation of monetary items on the balance sheet.
However, the last three items (Bayer, Coromandel and GSFC) will have a one-time impact on reported financials (in FY19), whereas only the core earnings impact will sustain through FY20 and beyond, IIFL said.
According to the research firm, the biggest beneficiary could be Deepak Nitrite, mainly owing to its new phenol project, which will have USD-linked spreads.
UPL will likely derive more than 85 percent of its revenues from outside India by FY20, post the Arysta acquisition, and hence could also see substantial benefit, it said, adding Atul has demonstrated significant leverage to the INR in the past.
It believes Navin Fluorine and SRF should also benefit more modestly. Tata Chemicals' overseas soda ash business gives it some advantage, while Rallis is a marginal net exporter while PI Industries’ custom synthesis typically passes on INR movements to customers, and so should remain relatively unaffected, it said.
For net importers, price hikes may be challenging near-term due to strained farmer finances, IIFL feels.
But IIFL is not negative on all three stocks though these companies are net importer and the rupee will have major impact on their earnings.
Among three, it has Reduce rating on Bayer Cropscience only (which fell 2 percent YTD) and expects stock to give negative return over a period of one year but in case of Coromandel Interational (which fell 31 percent YTD) and GSFC (down 40 percent YTD) it has Add and Buy rating with expectations of 35 percent and 44 percent return, respectively.
Here is what IIFL says about these three stocks:
Bayer CropScience
Bayer is a net importer, but typically passes on input cost increases to farmers. Therefore, under normal conditions, INR depreciation should not impact the company’s margins. However, agrochemical prices have already risen sharply in 2018, and farmers may balk at further price increases. This is a key challenge for Bayer.
Coromandel International
Like most Indian fertiliser companies, Coromandel is a net importer: it imports most of its key raw materials – ammonia, phosphoric acid, and potash – that are used for making fertilizers. Besides, in its crop protection business too, it imports certain chemical intermediates from China.
A weaker INR has made these inputs more expensive for Coromandel. While the company typically passes on these input cost increases to farmers, it has already taken (along with the rest of the fertiliser industry) substantial price hikes in 2018. DAP prices are up around 30 percent at the industry level so far this year, due to both INR depreciation and increases in prices of all inputs.
In such an environment, it remains to be seen whether farmers will be ready to accept further price increases or fertilizer demand will witness any pressure.
GSFC
Like Coromandel, GSFC too is a net importer, mainly due its imports of fertilizer inputs. It therefore faces similar pressures: of raising prices of its fertilizer products in an environment where farmer demand may already be under pressure.
In its chemical business, GSFC sells primarily in India, but its product prices are pegged to international prices. Consequently, the company may benefit from INR weakness, in that its spreads in INR terms could widen.
However, this benefit could be offset by any softness in fertilizer-segment margins for aforementioned reasons and, in addition, chemical-segment margins are highly volatile. Hence, quantifying the currency impact would add little value.
In case of other stocks, IIFL expects Aarti Industries, Navin Fluorine, Tata Chemicals, UPL, Rallis India and SRF to give 12-30 percent return.
Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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