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Equity investing amidst INR depreciation

, September 17, 2013, 0 Comments

Companies with considerable export revenue are relatively better bet when INR depreciates. Indian currency (INR) has been weakening since more than a year but it has been more so in last couple of months. Since, last week of May 2013, INR has depreciated by whooping 18% (data till 10th Sep). Sensex, barometer of the Indian stock market, has also performed poorly in line with weakening INR.

Source: BSE and OANDA (data till 10th Sep 2013)

Above chart clearly indicate that Sensex has been closely tracking performance of the India currency (INR). In last four-five months correlation between Sensex and INR-USD exchange rate has increased to -0.64 as against just -0.14 in last one year. Nonetheless, Sensex is down just c1% since 21st May 2013 as against INR which has depreciated c18%. Some may wonder why Sensex is still putting such a strong resistance.

Against this backdrop we get chance to talk about Sensex stocks which have considerable export revenue; such stocks are helping Sensex to put brave face. Companies with considerable export revenue are direct beneficiary of INR depreciation and such stocks are outperforming market. When everybody is talking about economic slowdown/crisis in India and INR is depreciating, companies with considerable export revenue are yielding good return to investors. We looked at performance of a number of Sensex stocks in last four and half months and results are summarized in the chart given below:

Source: BSE and author computation; return is calculated for the period of 21st May 2013 to 10th Sep 2013; dividend is not included in return calculation

We notice that most of the positive return yielding stocks has considerable export revenue as percentage of total revenue with some exception of defensive stocks such as Hindustan Unilever (HUL). No wonder IT stocks are topping the chart.  Higher the export, higher the positive correlation with high export revenue stocks and vice versa. The combined weightage of stocks with more than 30% export revenue (as a % of total revenue) in the Sensex is close to 37%; this helps Sensex resist the fall when INR depreciates.

Technology and pharmaceuticals stocks become the obvious choice when rupee depreciates mainly on account of higher export revenue.  However, investors should also look at other sector’s stocks as there are many mid cap/small cap stocks/companies with higher share of export earnings.

High export revenue generating socks are good buy when rupee depreciates. However, one should not forget importance of domestic businesses which are usually under pressure due to slowdown in the economy in such case.

About author
Rajesh Ranjan is a Chartered Accountant with Post Graduate Diploma in Investment Analysis and MBA(finance) from Asian Institute of Management (AIM), Manila. He has around nine years of experience in the field of investment research (equity and fixed income) with leading financial services firm such UBS and Guggenheim Transparent Value. ...more