Appreciating rupee plays spoilsport with IT stocks

After having a field day yesterday, when the Sensex boomed, the IT index today fell the most (10.10 per cent). IT majors like Tata Consultancy Services (TCS), Infosys Technologies and Wipro Ltd were down 8.72, 11.57, 9.57 per cent, respectively.

Analysts attributed the drop largely to the 4.63 per cent appreiation (since May till date) of the rupee against the US dollar. If the rupee continues to be at this level, analysts believe it will erode the top line growth of IT firms by 2-3 per cent and the operating margins by 2-2.5 per cent.

However, in the short term, the appreciation of the rupee against the US dollar may help IT firms reverse, to some extent, their mark-to-market (MTM) losses.

Firms such as TCS, Wipro, HCL and MindTree that hedged a huge amount of money and recorded mark-to-market (MTM) losses when the rupee was depreciating would now reap some benefits, even though the gains would be added to their non-operating revenue.

TCS has over $1 billion as hedges. Rajendra Shreemal, head, investor relations and treasury at Wipro Technologies, feels the company has hedged reasonably and takes care that it does not get impacted severely. Wipro has gross hedges worth $1.8 billion. “In this case, the rupee appreciation will impact the rupee revenue but will not matter to our dollar revenues, which we have guided for at constant currency,” he added.

“In the short term, the rupee appreciation will be highly beneficial to players like us as the MTM losses will just reverse. However, it is worth seeing if the rupee continues to appreciate or it is just a short-term phenomenon. It’s because neither all macro-economic issues are yet solved nor the policy makers, including the RBI, will allow the rupee to appreciate to safeguard the interests of various other sectors,” said Rostow Ravanan, CFO of MindTree. MindTree had hedged $180 million at Rs 41-42 and the entire portfolio is marked to market.

“The market had anyways factored in some pains for the sector as the volume growth is expected to be lower due to the global meltdown. Add to this the offshoring focus, which will bring down margins. Now, with a stable government at the Centre, FII inflows will increase, which may lead to the appreciation of the rupee.

But this time around, the rupee appreciation will impact the top line by 2-3 per cent if the rupee remains at the same level, although the effect on the bottom line will be less pronounced,” said Shashi Bhusan, vice-president, research, Pinc Research.

“The other reason is that IT stocks have been rallying for quite some time and it was time for some correction. Besides, it has been factored in that the IT bull run of 30-40 per cent growth rate is over. So it makes sense for many to sell their IT stocks and invest in other stocks,” said an analyst from a brokerage firm.

Among those who will be impacted the most if the rupee run continues is Infosys. The Bangalore-based firm is the only one among the top four which has hedged the least. As on March 31, 2009, Infosys had hedges of $530 million (Rs 1,600 crore). Infosys had provided its guidance with the rupee at 50 and now the rupee has touched 47.48. Analysts feel this will impact the earning per share (EPS) of the company, which at the time of the guidance was close to Rs 100. This would now go down to Rs 95-90, said an analyst.

V Balakrishnan, CFO of Infosys said: “The market today seems to be driven by sentiment than strong fundamentals. We need to see how the rupee behaves for the whole quarter and the fiscal.” When asked if the company would review its hedging strategy, he said it was too early to say as in a volatile market “we don’t want to take a long-term view on that.”

However, in a reverse trend, New Delhi-based HCL Technologies, while closed at Rs 158.90, saw a rise of 0.51 per cent. The company’s scrip touched an intra-day high of 5.3 per cent to Rs 167.45. HCL Tech, at the end of March 31, 2009, had balance hedges worth $1.08 billion.