As the fiscal fourth quarter earnings season approaches, Crisil Ratings has highlighted significant fluctuations in the Indian rupee against the US dollar. These changes, driven by ongoing geopolitical uncertainties, are predicted to affect the earnings of several sectors, potentially reducing them by as much as 250 basis points in fiscal 2026. Despite this volatility, Crisil maintains that the overall credit profiles of companies within its portfolio will remain stable.
Rupee Fluctuations and Economic Impact
From October 1, 2024, when the rupee was valued at ₹83.81 to the dollar, it dropped to ₹87.40 by February 28, 2025, only to recover slightly to ₹85.65 by April 3, 2025. This is in stark contrast to the 1-2% annual depreciation observed over the previous two years leading up to September 2024. Although the rupee has shown some recent appreciation, projections indicate it could decline further, settling around ₹88 by the end of fiscal 2026.
Sector-Specific Effects of a Weakening Rupee
The depreciation of the rupee significantly impacts sectors reliant on imported materials, leading to increased operational costs without a corresponding rise in revenue. Sectors particularly affected include:
- Complex fertilizers
- Airlines
- Oil and gas (refining and marketing)
- PVC pipes and fittings
- Capital goods
- Pharmaceuticals (APIs)
- Renewable energy
Crisil emphasizes that the extent of these impacts will vary based on foreign trade exposure, the ability to transfer cost increases to consumers, and hedging strategies. Some businesses may experience unique challenges based on their levels of unhedged foreign currency debt.
Potential Benefits for Export-Oriented Sectors
Conversely, a weaker rupee can bolster the earnings of net exporters such as:
- Information technology (IT)
- Home textiles
- Marine foods
These sectors may not experience significant adverse effects, especially those with substantial overseas trade exposure, like pharmaceuticals (formulations), chemicals, primary steel, gems and jewelry, ceramics, city gas distribution, and edible oils, thanks to natural hedges against currency fluctuations.
Detailed Sector Analysis
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Complex Fertilizers: Companies producing di-ammonium phosphate (DAP) could see an earnings drop of up to 200-250 bps due to high raw material import levels. However, existing subsidies help mitigate some of the negative impact from rupee depreciation.
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Airlines: Increased fuel costs from international refueling may lead to a profit reduction of 75-125 bps, despite revenue from foreign ticket sales. Over 50% of lease liabilities are hedged, which may cushion the blow.
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Oil and Gas: Operating profitability in this sector might decrease by up to 125 bps due to rising crude prices, although current favorable oil prices provide some relief.
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PVC Pipes and Fittings: This sector imports about 50% of its raw materials. While companies can pass some costs to customers, the impact could range from 50-100 bps on operating profits, influenced by market demand.
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Capital Goods: Profitability will vary widely, with imported components affecting some segments negatively while exporters fare better.
- Pharmaceuticals (APIs) and Renewable Energy: Both sectors could see minor pressures on profitability, primarily due to imported raw materials.
Positive Outlook for Certain Industries
The depreciation of the rupee is set to favor sectors like IT, marine foods (shrimp and prawn), and home textiles, which rely heavily on exports. Depending on cost management strategies, profitability in these areas may improve by up to 100 bps in the near future.
Conclusion
For industries such as pharmaceuticals (formulations), chemicals, gems & jewelry, and ceramics, the impact of rupee depreciation is expected to be neutral due to robust export and import activities balancing out the fluctuations. Similarly, sectors like city gas distribution, primary steel, and edible oils are likely to feel minimal effects thanks to their ability to pass cost changes to consumers.
Crisil states, "We will keep a close watch on these trends, engage with companies, and evaluate the implications for their credit profiles on a case-by-case basis."
For further insights on market trends and updates, you can explore related articles on financial analysis and currency fluctuations.
