FOCUS: Rupee rise to cut India chem profits

28 May 2007 12:06  [Source: ICIS news]

By Divya Chowdhury

MUMBAI (ICIS news)--An appreciating Indian rupee, which is at a nine-year high against the US dollar, is likely to reduce chemicals and petrochemicals companies’ profit after tax (PAT) by at least 10%, analysts and market sources said late Friday.

“For every 1% rise in the rupee, chemicals and petrochemicals companies’ profit after tax is like to fall by around 1%-2%,” Neeraj Mansingha, an analyst at Edelweiss Capital, told ICIS news.

The rupee is trading at Rs 40.52 to the dollar, up more than 8% from Rs 44.12 on 2 January. Treasury managers attributed the rise in the rupee this year to the absence of dollar demand, rising flows into equity markets from foreign institutional investors, a weaker dollar overseas and rising stock indices.

“The petrochemicals sector will be negatively impacted by an appreciating rupee as margins in India are a function of global prices and are adjusted for import parity,” said Amit Mishra, analyst with Macquarie Bank.

Reliance Industries Limited’s (RIL) PAT would fall by 1.4% with every percent decline in the rupee, Mansingha said.

“RIL is looking at a 10% fall in profits due to the rupee appreciation. But end-product prices, which have risen around 4%-5%, will offset some of the impact,” a source close to the company said.

The source said RIL is looking at a band of Rs38-Rs40 to the US dollar in the coming months. The company also plans to maximise domestic sales to lower the impact of the rising rupee.

“RIL plans to up domestic sales by at least 5% over a period of time. This would also help in making up for losses,” he added. But he refused to divulge the period in which the company planned to do so.

Other companies are also feeling the heat.

“An appreciating rupee would squeeze margins especially for companies that do business with the US or non-European countries, where they earn primarily in US dollars,” said Nilesh Sonawane, assistant manager-exports of Supreme Petrochemicals

But in cases where orders with Europe-based customers have already been frozen, companies would actually gain due to a strengthening Euro, he added.

“With nearly 60% products being exported, Supreme’s operating margins would be 5-10% lower this year. But we are raising prices to offset the impact. Besides, we are concentrating on the US and Europe, which will give us higher realisation instead of focusing on the [east Asian] markets,” Sonawane said.

Despite rising prices, there is no fall in demand, he added.

Meanwhile, the outlook for the dollar remains mixed.

The dollar might strengthen in the short term but it will weaken over time due to diversification of other currencies as investors start betting on other countries, said Jamal Mecklai, currency analyst.

“The foreign exchange market will remain volatile in the short term and respond to the global market. But I expect the rupee to touch Rs38 to the dollar next year,” he added.

However, Goldman Sachs says the rupee will depreciate going forward.

“The rupee appreciation has been unprecedented in its scale and timing,” the brokerage said in a note to clients.

The company expects the rupee to weaken due to a wider current account deficit, lower capital inflows against 2006-2007, a positive inflation differential with partner countries and pressure on the Reserve Bank of India to restore the currency’s competitiveness.

The only positive for chemical companies could have come from cheaper imports. But rising raw material prices are offsetting what companies could have gained from an appreciating rupee on that front, another industry source said.

($1=Rs 40.52, €1=Rs 54.50)

By: Divya Chowdhury
+65 6780 4359

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