India Strategy 8 Large cap rupee plays:: ICICI Securities

The rupee has depreciated by over 7% in the past one month. While most of the
rupee depreciation plays except metals and mining stocks have outperformed the
index, their performance is not in line with the quantum of benefits. We attempt to
pick the winners based on 1) The level of gearing of the stock earnings to rupee
depreciation, 2) Business / pricing conditions allowing the players to benefit from
rupee depreciation and 3) Valuations among sectors / large cap stocks positively
geared to rupee depreciation – IT, pharma, oil & gas, metals, and automobiles.

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􀁦 RIL and Cairn clear winners: 1) Earnings gearing – impact of over 1.65% and 1.3%
respectively for every 1% change in rupee, 2) Direct flow through to EBITDA with very
limited pricing discount impact along with no serious threat of sharp fall in commodity
prices. Key variables – oil prices (US growth to provide downside support), petrochem
prices / margins and refining margins – are largely expected to hold steady with
limited downside risk and 3) Reliance Industries (RIL) is trading at over a decade low
valuations on forward P/E basis assuming rupee at Rs57-59/USD. On SoTP basis
even assuming moderation of global peer multiples for petrochem and refining, target
price upside would exceed 35%. Cairn India at current price is reflecting crude price of
US$82/bbl at Rs57/USD and US$78/bbl at Rs59/USD.
􀁦 Wipro and Infosys second in preference: 1) Earnings gearing – high impact of
1.3%-1.8% for every 1% change in rupee, higher than RIL and Cairn, 2) Limited flow
through benefits due to multiple headwinds of immigration bill impact, wage
hikes/promotions, increasing investments and possible pricing adjustments (if
Rs59+/USD sustains) with limited margin levers on hand and 3) Valuations largely
reflect margin pressure and the stocks could rerate if margin pressures recede and /
or US business growth picks up. We prefer Wipro and Infosys to TCS due to their
cheaper valuations.
􀁦 Cipla and Sun Pharma: 1) Earnings gearing – moderate impact of 0.2%-0.3% (net
forex is hedged adjusted for import of RM) for every 1% change in rupee, significantly
lower than IT / oil & gas stocks, as exports / US subsidiary constitute only 30%-40%
of revenue, 2) No significant headwind, with most benefits flowing through to profits
and 3) Valuations on the higher side. We prefer Cipla in the space due to its higher
rupee gearing and lower valuations. Despite being the most expensive stock in the
sector, we prefer Sun Pharma on account of limited impact of drug price control and
superior growth.
􀁦 NMDC: 1) Earnings gearing – impact of 1% for every 1% change in rupee if pricing
were free, 2) Given limited pricing flexibility of fines / lumps, the flow through is almost
zero. However, rupee depreciation would relieve pressure to cut prices in the face of
global weakness in price and 3) Stock price is reflecting steep fall in realizations
despite largely fixed pricing. Expect NMDC to rerate when fear of price cuts recedes.
Prefer NMDC to other metal stocks due to risk to their earnings on account of possible
global commodity price fall.
􀁦 Bajaj Auto: 1) Earnings gearing – with 40% revenues from exports, impact of 1.5%
for every 1% change in rupee, 2) However, 12-month rolling hedges would mean
FY14 earnings impact is minimal. However, FY15 impact should flow through and 3)
the stock is cheap at less than 11.5x FY15E assuming rupee at 59/US$ and 13x
FY15E at Rs54/US$.