)
On a day when the stock markets celebrated the formation of a stable government at the Center, shares of information technology (IT) services companies reacted in contrast, with the sectoral index declining two per cent amid strengthening of the rupee against the dollar.
With expectations of this trend continuing, analysts said the export-oriented sector may remain under pressure in the near term. Shares may take a beating as investors are seen favouring infrastructure and heavy industries over IT, on hopes of improvement in spending by the government.
Indian IT gets 70 per cent of revenues from exports. Every one per cent movement in the rupee against the dollar impacts operating profit margins by 40 basis points.
On Friday, the rupee gained sharply, rising to an 11-month high of 58.62 to the dollar intra-day, on hopes of further inflows from foreign institutional investors. The rupee ended at 58.88 compared to its previous close of 59.29.
Reacting to the strengthening, the 30-share Sensex ended 216 points higher at 24,122 after hitting an intra-day high of 25,376. But shares of IT companies Tata Consultancy Services and Infosys fell 1.6 per cent and 2.8 per cent on Friday, respectively. Wipro fell 2.6 per cent.
Mid-sized companies also took a beating. Tech Mahindra, Mindtree and Mphasis fell between 0.5 and four per cent.
Sanjoy Sen, senior director, Deloitte India, said, “It was interesting to see some IT stocks taking a dip on the day the Indian stock markets overall scaled unprecedented heights.
“This indicates countervailing factors at play, including the strengthening of the rupee reducing the potential for an easy short-term way of increasing the top line.”
According to a Mumbai-based analyst, “For long enough, IT companies gained from a weak rupee. Now the trend is reversing. I don't think IT will be the flavour of this summer.”
The new government may revive spending on technology adoption by government departments. This may mean good news for IT companies.
Sen said, “The overwhelming optimism about expected growth in certain business sectors in India will increase IT focus on growing in domestic markets.
“Their global business is expected to grow, perhaps in a less uncertain and more supportive domestic environment, as the more mature economies experience growth and revival.”
Also, Narendra Modi, the prime ministerial candidate of the winning Bharatiya Janata Party, is considered one of most technology-savvy politicians. At a conference by sector body Nasscom this year, he spoke of inclusive development through technology in India.
“India’s Talent plus information Technology is equal to India Tomorrow,” he had said stressing on the need to bring down the digital divide in the country. He also held a closed-door meeting with a select group of technology chiefs last year who had apprised him of the major challenges facing the sector. Modi had asked them to prepare a white-paper with all their concerns, which could be considered for the party’s election manifesto. He also articulated the need for strong broadband connectivity in the country, digital literacy and e-governance.
Modi has also extensively used technology including social media in his election campaign during the past few months.
Analysts expect the country's overall spending on security and surveillance projects to rise with the new government led by Modi coming to power. "His government is expected to keep major technology projects like the National Intelligence Grid (NATGRID) which will add intelligence capability to the country," said an technology expert who did not wish to be identified.
The person added that even though the BJP has voiced some concerns regarding the UID project, it is expected to continue with some tweaks. "But, given his track-record so far, we expect strengthening of India's overall surveillance infrastructure."
