Mumbai: The rise of the rupee to its highest against the dollar in eight years pulled down IT stocks on Wednesday for the second time. Markets were closed on Tuesday. The greenback’s slide against the Indian unit dents the topline of IT firms as their dollar receivables from exports yield a lower equivalent of local currency. According to analysts, a 1% appreciation of rupee brings down the operating margin of IT firms by 30 to 40 basis points. (One basis point is one hundredth of a percentage point.) Stocks of IT majors Tata Consultancy Services (TCS) and Wipro lost close to 5% on the bourses, while Infosys Technologiesstock lost 3.15%. In fact, i-flex Solutions seemed to be the only IT stock bucking the downward trend.
The rupee climbed to its highest in eight years on Wednesday, coming close to 43 against the dollar before suspected central bank intervention halted the rise. It ended at 43.04/06 per dollar, off an intraday high of 43.01—its strongest level since November 1999, according to Reuters data. The rupee has gained more than 9% from a three- year low of 47.04 it hit last July. “We see the next support at 42.80. It’s unclear what the central bank would do now to check the rupee’s gains,” a private bank trader said.
A combination of the rising rupee and talk of a slowdown in the US economy determined how IT stocks moved. A crisis in the US sub-prime mortgage sector, which issues mortgages to high-risk borrowers, has raised concerns of the US economy dropping pace. The US contributes 67% of the revenue for the $47.8 billion Indian IT industry.
“Rupee appreciation or depreciation has an impact on the revenues booked as well as in the realization from debtors, when transmitted to India. The impact on margins is diluted to some extent because we will have dollar expenses too. Finally, the impact on margins will depend on the percentage of dollar expenses as well as the timing of the payment,” said S. Mahalingam, CFO, TCS. The firm’s operating margin for the quarter ended December 2006 was 29.98%.
TCS has hedged its foreign currency exposure to the tune of $589 million at around Rs45. This means that despite the value of the dollar falling to close to Rs43, the country’s leading software exporter will still get Rs45 per dollar it earns to the extent of hedged exposure ($589 million). “In our opinion, this will offset some of the impact of the rupee appreciation,” said Mahalingam.
But the markets discounted this. TCS stock lost 4.78% to close at Rs1,201 and Wipro lost 4.77% to close at Rs558. Among other stocks, Satyam Computer and Infosys shed 3.53% and 3.15%, respectively, to close at Rs456 and Rs1,992. I-flex was the only IT stock to rise, ending 1.10% higher at Rs2,017.
“Infosys is likely to get more affected than TCS as it recently brought down the level of its hedging quantum,” said an analyst with a Mumbai-based brokerage firm tracking the sector. “Satyam is another IT company which will be largely hit by rupee appreciation,” he said. However, firms with greater European exposure such as Tech Mahindra and Mastek Ltd are unlikely to face the impact of rupee appreciation and concerns over the slowdown in the US economy, analysts said.