As rupee sinks, IT gets a profit lift

As the rupee continues to slide against the dollar, hopes are rising in the Indian information technology sector that the greenback may save the sector some blues, at least in the short term.

On Tuesday, as the rupee sank to a 15-month low of 47.59 per dollar, the index for information technology stocks gained the most on the Bombay Stock Exchange, showing that the street expects these companies to make foreign exchange gains.

Such translational benefits will likely offset some negative impact from a possible fall in billing rates or reduction in work volumes from clients in the US or Europe, where economies are teetering on the verge of a recession.

The rupee depreciated 0.8% to 47.5925 per dollar at the 5 pm close in Mumbai, according to data compiled by Bloomberg. Earlier, the currency touched 47.6575, the weakest level since May 25, 2010.

At a 0.93% gain, sectoral index of IT stocks BSE-IT gained the most on BSE, which recorded a marginal fall of 0.21% on Tuesday.

Large Indian IT firms such as Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies get a lion’s share of their revenues in dollar and a weakening rupee literally means more bang for the buck for these firms.

“Typically, the thumb rule is, for every percentage that rupee depreciates, IT firms that have significant amount of their revenues billed in US dollar, there is a 40-50 basis points positive impact at the Ebitda level,” said Pralay Das, analyst with Mumbai-based brokerage Elara Capital.

“Last year, around the same time, rupee was at around 42 level against the dollar, so on an year-on-year basis there has been a material slide in the exchange rate, which will show up in the September quarter financial results.”

Shares of Infosys gained 1.21%, while and those of TCS and Wipro gained 1.25% and 0.61%, respectively on the BSE on Tuesday.

“It will benefit IT exports for sure,” said Suresh Senapaty, chief financial officer at Bangalore-based Wipro. “But given the current environment, I think rupee will be volatile. It will negate other factors, only if the IT industry goes through a downfall.”

Still, senior executives at Indian IT companies believe it would be wrong to take comfort in the impending short-term fillip.

“Though this will boost the bottomline of a company, I do not think the downfall is sustainable in the long run. This is more of an aberration. In fact, I feel such environment gives companies artificial comfort,” said Ganesh Natarajan, vice chairman & CEO, Zensar Technologies.

“At the end of the day, receivables are receivables. Once the rupee bounces back, things will be back to square one,” said Natarajan.
“I feel rupee is behaving quite erratically and the depreciation has gone beyond expectations,” said Ganesh Murthy, chief financial officer at MphasiS, a Hewlett-Packard subsidiary.

“So, though in the short run it might negate factors like low pricing, there will be corrections in the coming months.”

Continuing uncertainty in Europe could mean further weakening of the rupee, analysts say. Based on current visibility, some expect the rupee to fall to 48 level against the dollar in the short term.