Rupee impact on IT

The sector that has been a fence sitter throughout the spectacular stock matter rally, is Information Technology (IT), whose main concern has been the appreciation of the Rupee, which breached the 40-mark against the US Dollar last month and is presently at 39.48/49 a Dollar, as on October 5.

Notwithstanding the pharma stocks which seem disinterested whether its a 15-16-17 or 18,000 mark rally, almost all of the sectors, be it construction, power, metals, retail, or banking; stood up and asked to be counted for, in the unbelievable run-up.

IT, not long ago was considered to be the blue-eyed boy of the Indian stock market, and had lead the markets to many of its previous highs, even when the good old economy stocks had given-up. IT was the flavor of every season and on everybody`s list, be it a fund manager, FII, retail investor, trader or a punter. IT scrips which were once a matter of pride to have in ones portfolio have off-late been a matter of ridicule and failure to many.

Major Indian IT companies like Infosys, TCS, Wipro and Satyam are believed to have taken a hit at their bottomlines due to the strengthening of the Rupee as a large proportion of their revenues come from their exports to clients who are primarily based in the US. These include banks and financial services companies which have received a jolt due to the subprime crisis, which is relenting to subside even as the Federal Reserve is trying its best to keep these concerns at bay, by means of rate cuts and trying to keep these companies afloat.

However, the concerns are said to be more grave, after bankers like Northern Rock, UBS and Credit Suisse have accepted the mortgage defaults and are expecting a dent in their balance-sheets due to the subprime lending activities.

Today the world is keeping a close eye on what is happening in the US economy, as a slowdown in the world`s largest economy could adversely have a trickle-down effect on other economies worldwide and especially emerging markets like India.

So the two factors that are hugely impacting the Indian IT stocks, the appreciation in the home currency and the problems in the US economy can said to be hand-in-glove with each other.

On the other hand, the US Employment data that was released on Friday, reported that the job growth had exceeded forecasts, has sent out some mixed signals leaving investors puzzled whether there is really a crisis and has the economy laid to rest fears of the subprime. The Labor department said that employers added 110,000 workers in September, more than the market expectations of 100,000. The government also revised an August decline of 4,000 jobs, which had been the first drop in four years, to an increase of 89,000. The good numbers might also lead the Fed to think twice before cutting down the interest rates again.

Expressing confidence on the outlook for the US economy, Vice Chairman of the Fed, Donald L. Kohn on Friday said, ``Beyond housing, it is too early to tell what effect the financial market turmoil is having on household and business spending, though very preliminary and partial information suggest that thus far the effects seem to be limited... Over time, however, I anticipate that the economy will move back onto a moderate growth track. The housing market should gradually recover as the cutback in production and lower prices help reduce the inventory overhang.``

So is the subprime problem passed its prime and now a matter of passe or is it just a lull before a storm. A. Balasubramanium, CIO, Birla Sunlife Mutual Fund feels the subprime concern should not impact the Indian economy as it is currently perceived. ``Probably, on the contrary, India might get the benefit of likely fall in commodity prices and oil. As is known, local consumption and infrastructure spending are largely driving our economy``, he says.

IT companies might feel the heat of the rising rupee in the short term. The stocks in the sectors have underperformed the benchmark, Sensex, in the recent rally as investors expect a margin contraction due to strengthening of the Rupee. They no longer find a favor with investors after being on a southward journey for quite a few months, especially at a time when all the remaining sectors have outperformed.

But no one can estimate precisely as to what`s in store for the future, as industry majors like Infosys and Wipro have a track record of proving everybody wrong and beating all the market expectations; and raising their earnings guidance further. And if the industry leaders put up a good show despite the rupee appreciation, the pack will follow suit.

With the result season shaping up, all eyes are now glued on October 11, when the honchos of Infosys come out with their quarterly figures and give their outlook on the sector for the financial year.

Source Myiris