Tech stocks bogged down by Re concerns

Companies expected to post cautious guidance

Ahead of the earnings season, with financial results for the January-March 2004 quarter due next week, technology stocks came under selling pressure on concerns that a strong rupee will squeeze the sector's profit margins.

But analysts expect most of these companies to announce improved margins as they continue to make efforts towards lowering general administrative expenses and higher business volumes.

Moreover, the rupee has risen drastically only in the last fortnight, which means it will not dent earnings significantly for the last quarter.

Technology companies earn about 70 per cent of their revenues denominated in the dollar and any appreciation in the rupee decreases the rupee equivalent of the revenues.

"Now the worry is that companies will issue a cautious guidance for 2004-05 on account of the rupee factor," said a dealer with a local brokerage house.

Chetan Shah, analyst with Quantum Securities said: "The recent rupee strength poses no immediate threat to technology companies, as most of them remain fully covered on their net dollar exposures. Some companies such as Satyam, which maintain some cash balances in dollars, could get marginally affected due to lower end-of-quarter asset valuations."

He also added, "The billing rates in the industry are stable and expected to remain so for the next two-to-three quarters."

Apurva Shah, senior research analyst at Prabhudas Lilladhar, adds, "We expect the March 2004 quarter to be the third consecutive quarter of nearly 10 per cent plus volume growth, quarter-on-quarter."

He also added, "Our interaction with various companies leads us to believe that the strong volume growth environment is sustaining and incremental billing rates continue to steadily inch up for large companies."

Although tech stocks have severely underperformed the broader market over the past 12 months, analysts will expect strong results to lead to tech stocks outperforming indices over the coming 12 months.

The head of private client group with a domestic broking firm said "While the outsourcing blacklash and billing pressure have dampened sentiment for the software sector, the appreciating rupee is a major concern as it might impact profitability of tech companies. I expect the tech companies to give conservative guidance for the next fiscal which is putting pressure on the tech stocks."

Software bellweather Infosys Technolgy's stock price has eased down from Rs 5081.60 on February 22, 2004 to Rs 4999.85 today, down 1.61 per cent. Infosys is likely to set annual earnings guidance for the fiscal year through March 2005, along with its quarterly earnings on April 13.

Other frontline stocks are also under pressure. Wipro at Rs 1338 at today's close, is down 2.34 per cent from levels on February 22 and Digital GlobalSoft at Rs 834, is down 0.06 per cent. Satyam Computer, however, has gained 3.55 per cent during the last 10 trading sessions to close at Rs 306.30.

Even selected second-rung tech stock has witnessed selling pressure on the bourses in the last ten trading sessions. Scrips such as Mphasis BFL, Huges Software and Geometric Software has lost in the range of one to 7 per cent during this period.