Euro's 20% fall against the rupee to hurt exporters

Currency has a close co-relation to corporate earnings. Export income today accounts for over a third of CNX Nifty's earnings. As a result, any upward or downward movement in the currency impacts earnings in a meaningful way.

While the rupee has remained largely stable against the dollar in recent times, other currencies have weakened sharply against it. The euro, for instance, has depreciated 20% against the rupee in the last one year.

Currency analysts say that the euro is not done with the depreciation and the trend is expected to continue in 2015, as the region's economic outlook is expected to weaken further. Europe accounts for 17% of India's total exports. As a result, companies exporting to Europe may report a contraction in revenues and earnings, thanks the 20% fall in the euro.

Undoubtedly, the euro has fallen against a basket of other currencies as well and not just the rupee. However, Indian exporters may not be able to increase prices to offset the loss arising from a depreciation of the euro. Given the economic environment, European companies may not be willing to pay a higher price for imports, which may impact export volumes.

While the fall of the euro does not imply a sudden erosion in competitiveness because it has fallen against most major currencies in the world and not just India's rupee. However, there is no denying that receivables of Indian companies exporting to the euro zone will be impacted to that extent.

There are select sectors which have a much higher exposure to Europe than others. Software services exporters are seeing some stress thanks to cross-currency volatility. Indian vendors derive 31-48% of sales from Europe, which is why revenue and margins may come under pressure over the next few quarters.

The other sectors that have a sizable exposure to Europe include textiles, apparels, auto components, organic chemicals and iron & steel.

According to Spark Capital, apparel and footwear, with Europe accounting for 45% of India's total apparel & footwear exports, is likely to be impacted the most on account of a weaker euro.

Organic chemicals, iron & steel, electrical and machinery components are likely to be impacted as Europe accounts for 20-25% of the total exports in these sectors. Auto & auto components account for 19% of the sector's total exports. In the auto and auto components segment, Bharat Forge and Sundaram Clayton are names that are expected to see some impact. Exports to Europe account for 12% of their total exports.

The currency is a big risk to corporate earnings as India does not have the productivity enhancing tools that can offset the such a strong currency in export markets. Ridham Desai, managing director, Morgan Stanley (Research), says the rupee is currently overvalued by 7% and it is a big risk to earnings and growth.