Rupee Boosts Exports, Cuts Wal-Mart Supplier Yield: India Credit

[Hrishikesh Taparia]

Rupee Boosts Exports, Cuts Wal-Mart Supplier Yield: India Credit
2011-11-29 19:57:17.219 GMT


By Anoop Agrawal
   Nov. 30 (Bloomberg) -- Bonds of India’s exporters are
poised for their biggest gains in more than a year after the
rupee’s drop to a record low boosted earnings, even as the risk
of faster inflation drove down government debt.
   “The outlook towards exporters is going to turn favorable
in coming months and quarters,” Sunil Khandelwal, the Mumbai-
based chief financial officer at Alok Industries Ltd., which
supplies clothing to Wal-Mart Stores Inc., said in an interview
on Nov. 24. “The rupee’s weakness is not done yet.”
   Yields on five-year notes of Alok Industries have dropped
50 basis points this month, the most since October last year, to
10.92 percent, according to the Fixed Income Money Market and
Derivatives Association of India. The premium over government
debt narrowed 41 basis points to 218. The yield on New Delhi-
based cement exporter Jaiprakash Associates Ltd.’s 0.5 percent
euro-denominated convertible bond due in March 2013 fell 20
basis points to 7.93 percent, according to Icon Capital prices.
   The rupee’s 6.4 percent drop this month will help narrow
India’s current-account deficit by making exports cheaper and
imports more expensive, according to Moody’s Investors Service.
Widening trade and budget shortfalls have contributed to a 91
basis-point increase in yields for the nation’s benchmark 10-
year bonds this year. Comparable yields in the U.S. have slid
131 and dropped 20 in China.

                        Export Growth

   Alok Industries, which gets about 35 percent of revenue
from overseas shipments, predicts the currency will weaken by
about 4 percent to 54 per dollar by March. That compares with a
forecast of 58 by HSBC Holdings Plc and the 49.50 median
prediction of 23 analysts forecasts compiled by Bloomberg.
   The rupee’s drop is “beneficial to us,” S. Mahalingam,
chief financial officer at Tata Consultancy Services Ltd., a
computer-services provider that earned more than 90 percent of
its revenue from customers outside India in the year ended
March, said in an interview in Chennai, southern India, on Nov.
28.
   The currency’s slide will help Suzlon Energy Ltd. as the
Pune, western India-based wind-turbine maker buys supplies in
India and sells overseas, according to Chairman Tulsi Tanti.
This would be especially so the U.S. market, “which is very
competitive,” Tanti said in an interview in Mumbai on Nov. 14.
The U.S. is the world’s second-biggest wind energy market and
accounts for about 5 percent of Suzlon’s revenue.

                         Record Low

   Exports from Asia’s third-biggest economy climbed 36
percent in September from a year earlier, a 10th straight month
when the increase held above 30 percent. Imports rose 17
percent, with growth slumping almost 60 percent from August,
according to Commerce Ministry data.
   The rupee’s depreciation will help narrow India’s current-
account deficit over the “next few quarters,” Moody’s said in
a statement on Nov. 28. The shortfall in the broadest measure of
trade was $14.1 billion in the three months ended June, compared
with $5.4 billion in the previous quarter, according to
government data.
   The rupee declined 0.1 percent to 52.02 per dollar
yesterday. The currency touched 52.73 on Nov. 22, a record low.
The rupee has lost 14.1 percent versus the dollar this year,
compared with a 3.6 percent advance in China’s yuan, a 2.3
percent drop in Russia’s ruble and 9.9 percent slide in Brazil’s
real.
   India’s benchmark Sensitive Index of shares has declined
9.6 percent this month as global investors sold $851 million
more local shares than they bought through Nov. 28, according to
exchange data. International funds’ ownership of rupee-
denominated bonds was little changed from the end of October at
almost $22 billion.

                        Capital Flows

   “The rupee’s fall is expected to continue if you consider
the global economic conditions and subsequently a slowdown in
capital flows to the country,” Mitesh Shah, a vice president
for finance at Mandhana Industries Ltd., a Mumbai-based garment
maker. Exporters aren’t converting their overseas income on
speculation the currency could drop more, he said.
   The rupee will weaken to 54 per dollar by March, Shah
predicts. The company, which supplies garments to Tommy Hilfiger
BV and Giorgio Armani SpA, is looking to increase the share of
exports to revenue from 18 percent last year.
   The yield on 11.5 percent notes of Alok Industries due in
June 2016 has dropped six basis points, or 0.06 percentage
point, this week, headed for a third weekly rally. The
difference in yields between India’s five-year sovereign bonds
and corporate debt rated AAA by Standard & Poor’s Indian local
unit, Crisil Ltd., was 90 basis points yesterday, compared with
this month’s high of 94 reached on Nov. 23.

                      Wholesale Prices

   Yields on the government’s benchmark 8.79 percent notes due
in November 2021 were little changed at 8.83 percent yesterday,
according to the central bank’s trading system. The difference
in yields between rupee-denominated sovereign bonds due in a
decade and similar-maturity U.S. Treasuries was 685 basis points
yesterday, compared with a record-high 697 reached on Nov. 9,
according to data compiled by Bloomberg.
   India’s bonds returned 2.9 percent this year, the worst
performance among 10 Asian local-currency debt markets monitored
by HSBC, as inflation that has held above 9 percent since the
start of December 2010 crimped earnings for investors. The
nation’s wholesale-price index, which the central bank uses to
guide its monetary policy, rose 9.73 percent in October from a
year earlier after increasing 9.72 percent in September,
according to government data.

                      Revenue Shortfall

   The cost of protecting the debt of State Bank of India
against non-payment has more than doubled this year on concern
the government may miss its budget-deficit target. Five-year
credit-default swaps on State Bank, viewed as a proxy for the
nation, costs 360 basis points on Nov. 28, compared with 161
basis points at the end of last year, according to data provider
CMA, which is owned by CME Group Inc. and compiles prices quoted
by dealers in privately negotiated markets.
   The swaps pay the buyer face value in exchange for the
underlying securities or the cash equivalent should a company
fail to adhere to its debt agreements.
   Narrowing the government’s revenue shortfall to a targeted
four-year low of 4.6 percent of gross domestic product in the
year ending March will be a “challenge,” Finance Minister
Pranab Mukherjee said last month.
   Exporters betting that the rupee will drop further will be
disappointed, according to state-owned Andhra Bank.

                      Margins Pressure

   “The rupee’s fall has been overdone,” Vikas Babu, a
Mumbai-based currency trader at Andhra, said in an interview
yesterday. “The rupee’s worst is probably behind us.”
   Babu predicts that the currency will stay around 51 per
dollar to 52 per dollar in December.
   Three-month non-deliverable forwards were at 52.92 per
dollar yesterday, compared with 52.87 on Nov. 28, according to
data compiled by Bloomberg. The contracts allow foreign
investors to bet on currencies that aren’t fully or easily
converted and offer companies a way to hedge against price
swings.
   The Federation of Indian Exporters’ Organization estimates
the rupee will drop to 54.50 per dollar by March.
   “The rupee’s decline has brought respite,” Ramu Deora,
the Federation’s Mumbai-based president, said in an interview on
Nov. 23. “The exchange-rate windfall should lead to double-
digit growth in revenue and income in this quarter.”