Weak rupee: IT stocks back on investors' radar

MUMBAI: The stocks of top and mid-tier IT exporters are back on investors’ radar following a significant fall in the rupee over the past fortnight. The fact that weaker domestic currency boost export realisations is attracting investors towards the IT sector, which earns over 80% revenue through exports.

Over the past month, the benchmark S&P BSE Sensex has dropped by 5% whereas the S&P BSE IT index has gained 2%. Stocks of HCL Technologies and Infosys gained 7% and 3% respectively during the period. Wipro rose by a tad 1% while TCS shed 2%.

“The operating margin of IT exporters tends to increase by 30-35 basis points for every 1% depreciation in the rupee against the dollar,” Ankita Somani, IT analyst, Angel Broking told ET.

What may limit the positive impact of the weaker rupee on margins this time around will be the strategy of companies to pass on the benefits to clients. “Companies are choosing to reinvest the currency gains back in business amidst intense competition,” said Manik Taneja, IT analyst, Emkay Global.

Another factor that will impact IT exporters is the amount of foreign exchange hedging and the rate at which receivables are sold in the currency forward market. If this rate is lower than the average rate or the closing rupee/dollar rate for the June 2013 quarter, companies will have to report currency hedging loss in the profit/loss statement thereby adversely impacting the net profit.

For instance, NIIT Technologies has hedged 90% of net receivables for the June quarter at Rs 57.3 per dollar. If the rupee closes at a rate above this level, say at Rs 58, the company will book hedging loss, which will reduce its net profit and profitability.

Infosys had hedged $1,048 million at the end of March 2013 quarter. For TCS, cash flow hedges were around $1,150 million. Wipro had $2.1 million in hedges. HCL Tech had hedged $1.6 million.