Date:04/10/2007 URL: http://www.thehindubusinessline.com/2007/10/04/stories/2007100453091600.htm

Back IT stocks shed fear over rupee

Quarterly results, profit guidance would set the trend

Jayanta Mallick

Kolkata, Oct 3

IT stocks on Wednesday shrugged off the haunting fear of rupee appreciation’s negative impact on their earnings growth and surged ahead on the expectation that the worst is over on the currency score.

Even though rupee moved to 39.56 a dollar from the overnight 39.65, the BSE IT and BSE TECk indices outperformed the Sensex indicating a strong revaluation exercise based on higher revenue growth hopes and lower-than-apprehended rise in rupee in the quarter to September 30.

Infosys led the pack and shot up by 5.72 per cent, while TCS improved by 4 per cent, followed by Wipro (3.68 per cent). Satyam’s gain at closing was 1.86 per cent.

Mr Gul Teckchandani, an independent market strategist, told Business Line that on sequential basis, the September quarter growth in rupee was lower than the June quarter.

Rupee movement

“Rupee had moved sharply up by 8 per cent against dollar in the quarter to June 30 derailing currency hedging and resulting in losses. In the September quarter, its growth was restricted within 3 per cent providing ample elbowroom for adequate currency risk coverage”, he added.

A de-rating had already happened as IT stocks including frontline counters had hit levels close to their 52-week lows. According to Mr Harit Shah of Angel Broking, the substantial under-performance of top-tier IT stocks (till Monday) were strongly related to the rise in rupee.

“To put things in perspective, in FY2007, Infosys grew its topline by nearly 46 per cent YoY and its bottomline by almost 52 per cent YoY (excluding extraordinary and one-time items) In Q1FY2008, its topline rose by around 25 per cent YoY and bottomline by nearly 29 per cent YoY, marking a considerable climb-down”, Mr Shah added.

Influence on profits

The rising wages, particularly on offshore projects, also had an influence on the profits. With offshore wages increasing 15-20 per cent a year, margins of all IT companies had come under pressure, he felt. But he said that the recent correction in the frontline IT stock prices had somewhat been “overdone”.

The September quarter results and profit guidance would set the trend in period when jury would be out on a possible recession in the US and its impact on the Indian IT sector, analysts felt.