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Strong rupee hits export-heavy IT and pharma sectors

The rupee is on a roll. While analysts are expecting lacklustre numbers for the first quarter of 2017-18, the rupee has been steadily appreciating. The average dollar value was at Rs 64.46 in the first quarter, compared to Rs 66.94 during the same period last year (see chart). And experts say the rupee will display strength for some more time. “Since the fundamentals are improving—economy doing well, high foreign inflows, etc—the rupee should remain stable with a positive bias,” says Deven Choksey, Managing Director, KR Choksey Securities. While this may be good news for some sectors, export-oriented businesses will take a hit. Here is how.

Information technology
The first set of numbers from this sector were not inspiring. For instance, TCS reported results that were below the market expectations. “TCS results were below expectations on the EBIT and net profit front,” says Sarabjit Kour Nangra, VP Research- IT, Angel Broking. Most experts feel that other companies from the IT sector will also report weak numbers in this quarter. This is because the IT sector is facing multiple headwinds now in the form of entry restrictions and high visa costs. “The IT sector is facing multiple issues and the rupee’s appreciation will further complicate the situation,” warns Rajesh Agarwal, Head of Research, AUM Capital.

However, the sector will get some comfort from its European businesses because of the fall in the US dollar against the British pound and Euro. The structural problem at the IT sector is expected to continue in coming quarters as well. “Structurally IT sector is in a low growth mode now and also factoring in the strong rupee, we expect the sector’s bottomline growth to be sub 10% in 2017-18,” says Suhas Harinarayanan, Head of Research, JM Financial.

Pharmaceuticals
The situation in the pharma sector is also similar. The sector is expected to report only flattish growth in the first quarter. In addition to rupee appreciation, price erosion in the US is the biggest threat faced by Indian pharma exporters. The speed of approval for news drugs from US FDA have also came down. However, pharma companies continue to do well in other markets like EU, Japan, Russia, China, Brazil, etc and this should act as a cushion.The situation is bad on the domestic front also because the destocking by pharmacies before the launch of GST will result in lower revenues.

The situation is not significantly different for other export oriented sectors as well. For example, capital goods export is down due to subdued global demand. In addition to rupee woes, the textile sector also has to worry about the increase in cotton prices.

 

Source: The Economic Times
Added On: 2017-07-17