Indian companies face double whammy as Euro continues to weaken

Amid bets that the US Federal Reserve will raise interest rates in mid-2015, the Bloomberg Dollar spot index — a tradeweighted index of 10 major currencies — has reached its highest level since June 2010. The strength of the US dollar is affecting the value of crosscurrency pairs for the Indian rupee, the key reason for the rupee to appreciate by nearly 8% against the euro since the beginning of this year.

According to Bloomberg consensus estimates, euro is expected to trade around 1.25/dollar by end of next calendar year. A change in euro would mean an alteration in earnings trend for quite a few listed Indian companies such as Tata Motors, Motherson Sumi, Bharat Forge, Tata Steel, Hindalco, Crompton Greaves and Havells.

Most of these firms earn anywhere between 20-80% of their total revenues in euros. Currently, Europe makes up for 20% of India’s exports and accounts for about 17% of total imports.

According to a JPMorgan report, euro depreciation can impact Indian companies in two ways: first, it would impact direct trade with the euro zone and, second, it would impact the reported rupee-term earnings for their operations based in Europe