A weaker rupee is good news for tech firms.
A one per cent depreciation of the rupee against the dollar typically helps push up operating margins for IT firms by around 25-30 basis points. With the rupee having hit a near two-year low on Thursday’s at Rs 45.53, the Indian IT sector, has reason to cheer.
The rupee has now depreciated significantly by around 8 per cent over the past one month and by about 5 per cent since the start of July when it was Rs 43.33. So, if it stays at these levels till the end of FY09, IT firms could turn in an earnings growth, on average, of between 17-18 per cent.
The weaker rupee will be a relief for tech firms that have been grappling with a slowdown in the US economy, one of their biggest markets. In particular, the crisis in the financial space, resulting from the sub-prime crisis, has meant less business from that segment and vendors such as TCS have been particularly hurt.
The growth in volumes for tech firms was muted in the June 2008 quarter, a trend that is unlikely to change with IT almost certain to be lower this year, though offshoring could pick up later in the year. Besides, vendors are unlikely to be able to realise better prices in a difficult environment.
While the falling rupee will help all players, Infosys and Satyam, which use a mark-to-market hedge accounting policy, should gain more. Infosys also tends to hedge a lower portion of its forex exposure. TCS and Wipro, which follow a policy by which they hedge their cash flows, may not gain as much.
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The BSE IT index has outperformed the market,since January 2008 falling just 11 per cent compared with a 30 per cent fall in the Sensex. At Rs 1749, Infosys appears to be attractive valued at 17 times its estimated price earnings for FY09.
At Rs 836, TCS trades at 14 times its FY09 estimates and is understandably cheaper because of its larger exposure to the financial services space. Possibly because of its poor performance in the June quarter, Satyam commands a price-earnings multiple of just under 13 times forward while Wipro trades at just over 15 times.