Short Call: US dollar on a bumpy road, but not every currency will cash in the rough ride; BHEL, Skipper, Aadhar Housing Finance in focus

While a weaker dollar usually gives other currencies a chance to rise, the story this time around isn’t quite that simple.

After climbing uphill for most of 2024, the US dollar has swiftly declined in recent months, falling 5 percent from its peak earlier this year. The culprit? The Fed’s “jumbo-sized” rate cut, which took some shine off the greenback.

The relative strength of the US dollar has real-world effects as it can shift trade balances, impact foreign sales for multinational companies, and amplify or diminish returns for US dollar-dominated investors in other equity markets. While a weaker dollar usually gives other currencies a chance to rise, the story this time around isn’t quite that simple.

The key piece of the puzzle here is the interest rate differential, which is the gap between global central bank policy rates. This gap determines how appealing a country’s debt looks to investors, which can boost or sink its currency. The Bank of Canada, European Central Bank, People's Bank of China, and Bank of England began their rate-cutting cycle with varying intensity while the Bank of Japan chose to hike interest rates and the Reserve Bank of India stood pat on its current policy rates.

Given that the cycle of central bank policy normalisations across the world has been unequal and uncertain, this differential will continue to vary across currencies, eating away chances of equal appreciation of all currencies against the dollar.

While currencies like the euro and pound may take some time to recover, the recent yen rally may be tapped out, as pointed out by JPMorgan. JPMorgan also notes that even though the US dollar might soften modestly from here as the Fed goes on about its rate-cutting cycle, it will soften unevenly against major global currencies. However, our local currency, the Indian Rupee is expected to draw the benefits of this declining dollar, thanks to RBI's decision to stand pat on interest rates, thereby widening the rate differential in comparison to the US.

On the domestic front, the Indian Rupee also logged its best weekly performance of 2024 last week, following a year of depreciation. As the RBI works to control runaway appreciation and manage volatility, Indian equities are becoming increasingly attractive to foreign investors, potentially driving them back in search of higher returns. What’s behind this trend? The growing interest rate differential, as the RBI maintains steady rates while the Fed initiates rate cuts. Foreign institutional investors (FIIs) have already responded, purchasing Indian equities worth Rs 26,336.52 crore in September, a sharp reversal after selling Rs 20,339.26 crore in the previous month.

Bharat Heavy Electricals (Rs 274.20, +3%)

Shares gained following the notification of award (NOA) worth Rs 6,100 crore from NTPC for the 800 MW thermal power project.

Bull Case: Thermal power equipment demand is growing, driven by the need for grid reliability. Company secured large coal-based power orders, including 26 GW from NTPC and 11 GW from Adani. The company's order inflow for FY25 is projected to reach Rs 1 trillion, supported by strong demand. The company is diversifying its order book with non-thermal projects such as the Vande Bharat trainsets and defence orders (SRGM naval guns).

Bear Case: Delays in order inflow or execution of slow-moving orders could impact growth. Dependence on coal-based capacity additions carries risks if the energy transition accelerates towards renewables.

Skipper (Rs 478, +15%)

Shares rallied after Axis Securities initiated coverage with a 'buy' call and a target price of Rs 600.

Bull Case: With in-house capabilities for Structure Rolling, Manufacturing, Tower Load Testing, and Transmission Line EPC, Skipper stands out from its competitors. Its expertise in executing high-voltage power transmission projects gives it a clear competitive advantage.

Bear Case: The company operates in an industry with high working capital requirements. The company may face delays in recovering its dues and may face liquidity issues. Its integrated manufacturing involves raw material inventories leading to higher inventory days (134 days in FY24).

Aadhar Housing Finance (Rs 501, +7.92%)

The stock surged on heavy volumes to hit a fresh record high of Rs 503.15

Bull Case: Aadhar Finance's strong AUM growth driven by geographical expansion, steady NIMs from higher floating rate loans, operating leverage through strategic growth, and a stable credit environment are expected to boost return ratios in the coming years.

Bear Case: Increased competition from larger players in affordable housing, potential challenges in maintaining asset quality, and a broad-based economic slowdown could slow Aadhar Finance's AUM growth, shrink margins, and raise credit costs, impacting earnings.