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India Equity Research Reports, IPO and Stock News
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● The INR has fallen sharply against major currencies recently. The
IT services sector gains from an INR depreciation.
● An INR depreciation impacts the P&L in three ways: (1) EBIT goes
up, (2) translation of current assets, mainly receivables, help net
income and (3) losses on hedges hurt net income. Companies
usually pass the impact of translation of long-term loans through
the balance sheet. A 1% depreciation aids EBIT by 3–9% for our
coverage universe, but the quantum of losses on hedges will
determine the PAT impact.
● For the Sep-11 quarter, INR has depreciated by 2%/1%/1% on
average against the US$/pound/euro. We estimate this to help
operating profit margin by about 80-100 bp.
● A persistent INR depreciation poses upside to consensus
numbers or can be somewhat of a mitigant if a recession does set
in. The currency movement has been unpredictable—we wouldn’t
argue that this can is a key driver for stocks but if INR were to
depreciate, it would be a bonus. Mindtree is relatively the most
leveraged to the currency due to its lower margins and higher
proportion of INR-denominated costs.
Sharp recent depreciation of the INR
INR has depreciated 7% against the USD in the past three weeks and
2% against the pound/euro during the same period.
As our Global Emerging Markets (GEM) strategist, Sakthi Siva points
out in her recent note (Currencies: More downside, 21 Sep 2011),
interest rate differential is a key driver of GEM currencies and there is
further potential downside in countries such as India where there is a
potential negative interest rate differential in 2012E
INR movement impacts the P&L in three ways
A 1% INR depreciation boosts operating profit margin (OPM) by 50-60
bp for our coverage universe . Companies with lower OPM
benefit more due to the higher leverage effect.
Receivables (and some current assets such as allowances given to
employees travelling overseas) are translated at period-end exchange
rates—this translation boosts net income when the INR depreciates
Companies hedge their inflows and usually use cash-flow
hedge accounting. Change in hedge positions during the quarter and
lack of information on exact tenures/cash flow matches make it difficult
to estimate the impact. In addition, there are cross-currency movements,
though 70%+ of net inflows are usually USD-denominated.
The Sep-11 quarter
While INR has fallen sharply in the past few days, it has fallen only 1-
2% against major currencies on average quarter to date.
We estimate this can still help OPM approximately by 80-100 bp.
Translation impact can be significant depending on the quarter-end
rate, but so can losses on hedges. We believe, overall, there should
be a net positive impact. Among our coverage universe, Mindtree
could be the biggest gainer (excluding impact of hedges), as it has
lower margins and a higher proportion of INR-denominated costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● The INR has fallen sharply against major currencies recently. The
IT services sector gains from an INR depreciation.
● An INR depreciation impacts the P&L in three ways: (1) EBIT goes
up, (2) translation of current assets, mainly receivables, help net
income and (3) losses on hedges hurt net income. Companies
usually pass the impact of translation of long-term loans through
the balance sheet. A 1% depreciation aids EBIT by 3–9% for our
coverage universe, but the quantum of losses on hedges will
determine the PAT impact.
● For the Sep-11 quarter, INR has depreciated by 2%/1%/1% on
average against the US$/pound/euro. We estimate this to help
operating profit margin by about 80-100 bp.
● A persistent INR depreciation poses upside to consensus
numbers or can be somewhat of a mitigant if a recession does set
in. The currency movement has been unpredictable—we wouldn’t
argue that this can is a key driver for stocks but if INR were to
depreciate, it would be a bonus. Mindtree is relatively the most
leveraged to the currency due to its lower margins and higher
proportion of INR-denominated costs.
Sharp recent depreciation of the INR
INR has depreciated 7% against the USD in the past three weeks and
2% against the pound/euro during the same period.
As our Global Emerging Markets (GEM) strategist, Sakthi Siva points
out in her recent note (Currencies: More downside, 21 Sep 2011),
interest rate differential is a key driver of GEM currencies and there is
further potential downside in countries such as India where there is a
potential negative interest rate differential in 2012E
INR movement impacts the P&L in three ways
A 1% INR depreciation boosts operating profit margin (OPM) by 50-60
bp for our coverage universe . Companies with lower OPM
benefit more due to the higher leverage effect.
Receivables (and some current assets such as allowances given to
employees travelling overseas) are translated at period-end exchange
rates—this translation boosts net income when the INR depreciates
Companies hedge their inflows and usually use cash-flow
hedge accounting. Change in hedge positions during the quarter and
lack of information on exact tenures/cash flow matches make it difficult
to estimate the impact. In addition, there are cross-currency movements,
though 70%+ of net inflows are usually USD-denominated.
The Sep-11 quarter
While INR has fallen sharply in the past few days, it has fallen only 1-
2% against major currencies on average quarter to date.
We estimate this can still help OPM approximately by 80-100 bp.
Translation impact can be significant depending on the quarter-end
rate, but so can losses on hedges. We believe, overall, there should
be a net positive impact. Among our coverage universe, Mindtree
could be the biggest gainer (excluding impact of hedges), as it has
lower margins and a higher proportion of INR-denominated costs.
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