The sharp appreciation in the rupee against the dollar in recent months is likely to have dented the first-quarter (current fiscal) profitability of exporters that source locally and have limited pricing power. Those having natural offsets such as sizeable imports, or foreign currency loans and currency hedges, would be less impacted.
The credit profiles of a majority of exporters rated by CRISIL have weathered the currency appreciation so far, notwithstanding the impact on profitability.
CRISIL’s analysis of the largest 10 export-oriented sectors from its rated portfolio shows leather, textiles, meat, seafood and basmati rice sectors were the most vulnerable to rupee strengthening. Foreign currency losses for these exporters – assuming everything else was business as usual – are estimated at 200-300 basis points (bps) of net sales during the first quarter, given the ~4% appreciation in the rupee.
For exporters of pharmaceuticals and agrochemicals, the impact would be much lower at ~150 bps given that their imports provide a partial natural hedge. For the gems & jewellery sector, exports largely match imports leading to minimal impact. The information technology (IT) sector would be the least affected given the extensive hedging practised there, but the extent of hedge in terms of the time period will determine the impact on individual companies.
At the net profit level, the impact would be 50-150 bps because of another offset – forex-denominated working capital loans – availed of by most exporters. Depending on the contribution of exports to sales, 50-90% of borrowings are foreign currency-denominated in the aforementioned sectors.
Notwithstanding the forex losses, the credit profiles of exporters will only see a marginal impact. Leading exporters in IT, pharmaceuticals and agrochemicals sectors from CRISIL’s rated portfolio have high operating margins of 15-25%, and gearing under 1 time; they have sufficient cushion to absorb forex losses.
Exporters in the vulnerable sectors, on the other hand, have increased their currency hedges and are also trying to adjust their prices to cushion the impact. The credit profiles in these sectors are driven by a combination of relatively inflexible-cost domestic sourcing, low profitability and modest credit profiles.
However, they had managed profitability and credit profiles reasonably well in 2011 when the rupee had appreciated nearly 4%. Operating profitability had declined by less than 100 bps then because demand outstripped supply, and there was a comparable appreciation among competing currencies, too. Even now, basmati rice exporters are likely to offset the majority of their forex losses through better realisation given strong and inelastic demand.
Says Anuj Sethi, Senior Director, CRISIL Ratings: “While a majority of exporters have weathered the forex storm so far, any significant rise in the rupee from here would impact credit profiles of exporters in the vulnerable sectors. The rupee’s relative strength versus competing currencies and business challenges constrain the competitiveness of exporters in some sectors.”
For instance, challenges on the demand (IT, pharmaceuticals, leather sectors facing pricing pressure or sluggish demand in the US and Europe) and supply (leather, meat sectors facing availability issue due to cow slaughter ban) sides leave exporters rated below ‘CRISIL BBB-’ (moderate safety level), or those with limited hedging and pricing power, more vulnerable.
The impact of further appreciation in the rupee on the credit metrics of exporters, and the measures taken to guard against future volatility will be the key monitorables.