'Rising rupee to lower price targets of IT firms'

MARKET VOICE: Rahul Jain, Research Analyst, Angel Securities

Rahul Jain, research analyst (information technology), Angel Securities, gives Puneet Wadhwa his take on the performance of the IT sector

What is the outlook for technology stocks, given the strengthening rupee?
Most market participants expect the rupee to appreciate further. We believe such an upward movement of the currency may hurt the IT sector, especially if the currency appreciates beyond Rs 42 a dollar, which may result in scaling back of price targets.

How do you expect the rupee-dollar equation to pan out in the medium term?
We believe the rupee may appreciate in the medium term to Rs 44-45 and touch the Rs 42 level in FY12.

What will be the impact of the hardening rupee on the fortunes of IT companies in the fourth quarter?
Continued strengthening of the rupee would result in lower top line growth in rupee terms as against the growth in dollar terms. IT companies with high forex cover to sales ratio (hedging) will see relatively better realisations in the coming quarter. At the same time, companies would also register strong forex gains on their hedged portfolio.

Any good bets in the large- and mid-cap space?
We continue to remain positive on the IT sector, with Infosys and TCS as our best picks among the large-cap stocks. In the mid-cap space, we believe MphasiS will be a strong performer.

We also like Tech Mahindra, supported by economical valuation (9x on FY12) and positive news flow from Mahindra Satyam.