COVER STORY

We know already that the INR has depreciated by more than 3 per cent against USD and 6 per cent against euro and yen between August 11 and 28. Explaining the reason for this depreciation, Pandey says, “China is India’s largest trading partner with export to China valued at USD 16.4 billion, while the imports from China are to the tune of USD 58.2 billion. Devaluation of the yuan thus puts pressure on the rupee. India’s REER (real effective exchange rate), which is the weighted average of a country’s currency relative to an index or basket of other major currencies, is also suggesting that the currency is overvalued at the current juncture.”

Another important factor that is putting pressure on the rupee is a possible hike in interest rate by the US Fed this year. Any increase in the US Fed rate will attract more funds there, which in turn will put pressure on the emerging market currencies, including that of India. In the words of Susan Joho, “Currently we believe that the start of the US rate normalisation could be more important to the global economy as it will quite likely shiftfunds awayfrom emerging markets.” However, we believe that the impact will be less severe than the taper tantrum’ that what we saw in the year 2013 when there was a free fall of the Indian rupee. Pandey believes that, “ThE US Fed hike issue has been overplayed as this time around with a stable government, better forex reserves, improved CAD situations, and better growth forecasts going ahead, the impact is likely to be much lesser.” Similar thoughts are expressed by Joho who says, “India’s credible monetary policy, replenished FX reserves, and an expected upswing in the economic cycle should lead to an outperformance of the INR vis-a-vis the Asian emerging market peers.” 

 Regardless, the fact remains that the Indian rupee has depreciated against the USD in the last few months and we may see it further depreciate in the coming months. A weaker local currency adds debt burden to Indian companies. Th is hurts the performance of those companies that have huge foreign currency denominated loans sitting on their books and even those companies that are net importers. “Pockets Pankaj Pandey Head – Research, ICICI Securities China is India’s largest trading partner with export to China at USD 16.4 billion, while the imports from China are USD 58.2 billion. A devaluation of Yuan thus puts pressure on INR, as the weaker Yuan with huge exposure to foreign debt along with the net importers would be the impacted segment due to rupee depreciation,” Pandey says.

As per information availed from a prime database, since the year 2009 more than USD 64 billion has been raised by Indian companies either through ECB or convertible bonds, better known as FCCBs. Th ese companies will now have to shell out more to repay their principal and interest. Th erefore, highly leveraged and net importers will be most impacted by the depreciation of the INR. According to a report by India Ratings & Research, among the 500 top-listed borrowers (ex-banking and financial services), 234 corporates had a negative sensitivity to INR depreciation in FY14. Th e report further states that if the rupee depreciates by 1 per cent against may not have changed so meaningfully in the last one year. In terms of sectors, Abhishek Anand feels that “a few importled sectors such as steel, electronic goods, hardware, power equipment and telecom equipment may get adversely impacted. Also, some infrastructure-based companies with high foreign debt would be negatively impacted due to the rupee’s depreciation.” The sectors that are clearly going to gain from the depreciating rupee are IT and pharmaceutical
In our constant endeavour to update our readers about themes that they should invest in or avoid, in the following graphs we will list the companies that are more vulnerable to fall in the value of rupee against USD and should therefore largely be avoided. Along with this, we are also analysing some companies that you should stay away from.
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Reliance Communications, the most leveraged Indian telecoms carrier has a net debt-to-EBITDA ratio of almost five times. Th e company’s net debt rose to Rs.38,600 crore at the end of June from Rs.36,730 crore as of March 31, primarily due to an initial payment for telecoms airwaves won in a government auction in March. Th e company’s net debt-to-EBITDA ratio currently is about 4.64. In general terms, debt-to-EBITDA ratio is the measure of the ability of a firm to pay offits debts and is a useful tool in assessing the creditworthiness of a company. Th e larger ratio means less creditworthiness. Th e company has focused on its deleveraging target to bring the net debt-to-EBITDA ratio down to around 3.5 by March 2017. In the beginning of FY16, the company has raised USD 300 million by J indal Stainless, net worth fell into negative to Rs.658.74 crore as on March 31, 2015 from its peak of Rs.2,252.89 crore five years ago. Th e company has been incurring losses since 2012. It had reported Rs.181.44 crore loss in FY12, Rs.842.04 crore loss in FY13, Rs.1,368.09 crore loss in FY14 and Rs705.08 crore in FY15 on consolidated basis. Despite India being the third largest producer of stainless steel in the world, Chinese imports have risen over eight times in the last five years, putting pressure on domestic manufacturers. Higher input prices which came in the way of the company for ramping up its operation in Odisha and sharp depreciation of rupee against USD dollar also had an adverse effect on the profitability, resulting in net worth erosion. Th e company’s rejig plan includes demerger and listing of a subsidiary on issuing off shore bonds at 6.5 per cent p.a. with a maturity of five-and-a-half years. Th e company is clearly exposed to US dollar appreciation (rupee depreciation) risk since nearly two-thirds of its total debt is in USD, against which it does not have a natural hedge, like many others in the region which depend on exports for part of their revenue or generate revenue from globally. Considering the above factors we recommend you keep away from this counter as depreciating currency will always remain a overhang on company’s performance

Jindal Stainless, net worth fell into negative to Rs.658.74 crore as on March 31, 2015 from its peak of Rs.2,252.89 crore five years ago. Th e company has been incurring losses since 2012. It had reported Rs.181.44 crore loss in FY12, Rs.842.04 crore loss in FY13, Rs.1,368.09 crore loss in FY14 and Rs.705.08 crore in FY15 on consolidated basis. Despite India being the third largest producer of stainless steel in the world, Chinese imports have risen over eight times in the last five years, putting pressure on domestic manufacturers. Higher input prices which came in the way of the company for ramping up its operation in Odisha and sharp depreciation of rupee against USD dollar also had an adverse effect on the profitability, resulting in net worth erosion. Th e company’s rejig plan includes demerger and listing of a subsidiary on domestic bourses and for that the company has received approval from stock exchanges. At present, the steel maker’s long term debt stands at around Rs.8,118 crore that will come down by Rs.5,000 crore post-restructuring, as per management. Out of total long term debt that company has around 20 per cent are in FCCB/ECB. Looking at the fall in commodity prices and foreign currency denominated loans in the company’s book we recommend you keep away from this counter.
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Jain Irrigation Systems (JISL) is engaged into micro irrigation systems. JISL also manufactures polyethylene (PE) pipes, polyvinyl chloride (PVC) pipes, tissue culture banana plants. Th e Company operates in three segments include hi-tech agri input products, industrial products and non-conventional energy. Th e consolidated net sales of company for Q1 FY16 have increased by 2 per cent to Rs.1587.41 crore. Operating profit margin inclined by 78 bps to 13.7 per cent. PAT decreased by 7 per cent to `18.76 crore due forex loss and increase in tax rate. Management indicated net debt rose by Rs.60 crore (includes MTM forex loss of Rs.24 crore) on sequential basis to Rs.2,920 crore on standalone basis and by Rs.95 crore (includes MTM forex loss Jindal Photo (JPL) will be most impacted by depreciating Indian currency. This is because the Key materials required for the manufacture of photographic products are import-based and therefore the business is susceptible to the volatility of the exchange rate. Besides, at the end of FY14, a total of Rs.670.77 crore of foreign currency loans was sitting on the books of the company. As INR has depreciated by around five per cent year till date out of which most of that has come in last one month, we believe the impact will be visible from the second quarter of FY16. Th ere are other factors that do not go in the favour of the company. With the digitalization in photographic segment happening rapidly is affecting the sale of roll films and hence company’s fi nancial performance. Total income from operation of the company has seen a continuous decline since FY13 while the bottomline of the company has also slipped into red from black in the same period. Beside fall in of Rs.38 crore) to Rs.4,000 crore on consolidated basis. Therefore, net debt to equity stand at 1.85x. Out of this around Rs.300 crore loan is in FCCB which is due from September 2017. Management has guided for double‐digit consoldiated revenue growth for FY16. It expects to achieve 15 per cent growth in MIS businesses in FY16. However, looking at the sluggish growth in first quarter of FY16, rise in foreign currency debt, which is likely to bear down on bottomline, we recommend avoiding this stock as per current market situation.

Jindal Photo (JPL) will be most impacted by depreciating Indian currency. Th is is because the Key materials required for the manufacture of photographic products are import-based and therefore the business is susceptible to the volatility of the exchange rate. Besides, at the end of FY14, a total of Rs.670.77 crore of foreign currency loans was sitting on the books of the company. As INR has depreciated by around five per cent year till date out of which most of that has come in last one month, we believe the impact will be visible from the second quarter of FY16. Th ere are other factors that do not go in the favour of the company. With the digitalization in photographic segment happening rapidly is affecting the sale of roll films and hence company’s financial performance. Total income from operation of the company has seen a continuous decline since FY13 while the bottomline of the company has also slipped into red from black in the same period. Beside fall in of Rs.38 crore) to Rs.4,000 crore on consolidated basis. Th erefore, net debt to equity stand at 1.85x. Out of this around Rs.300 crore loan is in FCCB which is due from September 2017. Management has guided for double‐digit consoldiated revenue growth for FY16. It expects to achieve 15 per cent growth in MIS businesses in FY16. However, looking at the sluggish growth in first quarter of FY16, rise in foreign currency debt, which is likely to bear down on bottomline, we recommend avoiding this stock as per current market situation. sales, rise in finance cost has led to such worsening performance of the company. In a separate development company has transferred its two manufacturing units, one in Daman & Diu and the other in Samba (Jammu & Kashmir) to Jindal Poly Films (JPFL) at the consideration of 1,738,700 shares of JPFL to the existing shareholders of JPL. Th e division registered revenue of `1.5 billion for the half year ended September 30, 2014. Going ahead, if rupee continues to slide then we may the performance to deteriorate further and hence readers to stay away from the scrip. 
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HEG is a leading manufacturer of graphite electrodes in India with an installed capacity of 80,000 tonne per annum (TPA). From the last three to four quarters, the company has reported subdued numbers in terms of topline, EBITDA and bottomline. In FY15 its topline declined by 15.37 per cent from Rs.1,458.91 crore in FY14 to Rs.1,234.63 crore and the EBIDTA (before foreign exchange fluctuations) declined from Rs.267.76 crore to Rs.207.61 crore during the corresponding period. Its PAT decreased from Rs.86.62 crore in FY14 to Rs.39 crore in FY15. Even in Q1 FY16, the company reported net loss of Rs.10.55 crore as against Rs.18.94 crore in Q1 FY15. Th e graphite electrode industry is passing through a challenging environment due to negative growth in the steel industry and steel pricing has worsened recently due to China aggressively exporting about 100 million tons which is about 15 per cent of their total production to all parts of the world, thus forcing the steel prices to drop everywhere and resulting in consequent decline in steel production in the rest of the world. About 80 per cent of HEG’s revenues are derived from exports and therefore it has natural hedging against ECB. However, the company’s topline has consistently declined quarter on quarter. As of FY15, the company’s long-term borrowing stands at Rs.252.37 crore and out of that around 50 per cent of debt is in the form of ECB. Th erefore, we recommend avoiding this stocks.