Bluechips with big export play bounce back despite concerns

MUMBAI: Shares of bluechips like Reliance Industries, Bajaj Auto and Hindalco, which sell a significant portion of their output overseas, are making smart gains on the back of ‘exporter’s premium’, according to experts.

With the fall in the rupee, the export earnings of these companies — some of which have half of their earnings coming from overseas markets —has risen, helping cushion their stock prices against the effects of slowing domestic demand and market volatility. “A number of companies will continue to have export premium over non-exporting companies as long as the rupee stays above 60 levels,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services. “In recent times, companies like Reliance Industries and Bajaj Auto have become safe harbour for investors.”

According to experts, some of these stocks have outperformed the market with gains of up to 35% despite a rash of negative news—from falling output to slowdown in domestic demand.

For instance, shares of Reliance have been holding steady despite gas output from the company’s D6 block in the Krishna-Godavari basin falling to an all-time low of 15 mmscmd.

Although several analysts have turned bearish on the auto sector due to falling demand and rising fuel prices, many are still positive on Bajaj Auto, as over a third of its earnings come from exports.

“We have been advising investors to have exposure in these kinds of companies apart from technology and pharmaceutical stocks which are direct beneficiary of the deprecating rupee,” Mathews said.

Brokerage houses, too, are recommending some of these companies to clients, as the valuation of firms such as Reliance Industries, Hindalco and Bajaj Auto are trading at attractive levels compared with those from the IT and pharmaceutical sectors, which gain from a drop in the value of the rupee.

“Auto companies such as Bajaj Auto and Bharat Forge are definitely commanding a export premium in the markets.

But stocks such as Reliance Industries, Sesa Goa, and Hindalco are benefiting from the reversal of the commodity cycle and economic revival in China,” said Sonam Udasi, head of research at IDBI Capital.

Falling industrial output month after month has been a serious concern for many money managers, as these macro data points darken the visibility of future earnings of domestic companies. The depreciating rupee also adds to inflationary pressure in the economy, which in turn impacts domestic business.

However, fund managers caution that taking an investment decision entirely on the falling rupee may not be a good idea, as a recovery in domestic business holds the key to future stock performances.

“Some of the companies are benefiting from their presence in international markets due to the rupee’s deprecation. But investors have to also look at their domestic businesses, which are under pressure due to the slowdown in the economy.

There could be huge upside for these stocks if there is balance between export and domestic earnings,” said Vinay Khattar, head of research and vice-president at Edelweiss.

The rupee has fallen nearly 19% against the dollar in over four months. On Thursday, the currency hit a low of 68.83 before recovering to 63.50 levels. Money managers say that although in a situation like this, technology and pharmaceuticals stocks become the obvious choice, one should look beyond these sectors as there are many mid-cap companies with higher share of export earnings, and where the stock valuations are available cheap.