IT stocks don’t track the rupee

IT stocks don’t track the rupee

Just when it seemed that capital controls had managed to stem the rise in the rupee, the local currency did an about turn and has appreciated by 1% in the past five trading sessions.

Surprisingly, the rise in information technology (IT) stocks has continued. The CNX IT index of the National Stock Exchange (NSE) has risen 4% during the period, adding to 4.4% gained in the preceding three sessions. This raises the question: do IT stocks track short-term movements in the rupee?

A Mint study of price movements since March reveals that they don’t. The chart alongside clearly shows that although the appreciation in the rupee occurred mostly between March and May this year, the main bout of correction in IT stocks occurred much later, between end-July and end-August. In fact, while the rupee appreciated by 9.2%, from a high of 44.68 against the dollar in the first week of March until end-May, the IT index rose by more 5% during the same period. On the other hand, when IT stocks were correcting sharply, the rupee depreciated by nearly 3% to 41.35 per dollar. Analysts point out that the markets track medium- and long-term expectations of where the rupee is headed, rather than react to short-term movements. This explains the lagged effect on IT stocks.

But it’s also important to note that the correction during August was largely because of the US subprime concern and the impact it would have on IT companies’ US clients. Similarly, the sharp correction of about 20% during October and November occurred at a time when the rupee was flat at around 39.5 per dollar. Rather than the rupee, the trigger for the correction was renewed concerns about a slowdown in US tech spending. While huge write-downs by US banks fuelled such worries, Cisco Systems Inc.’s comments in early November confirmed that things were far from hunky-dory with the main tech spenders in the US. The resurgence in IT stocks lately is also not because of the stem in the rise of the rupee, but simply because quality stocks were available at cheap valuations.

Indeed, large IT firms have demonstrated through their performance in the September quarter that they can offset a gradual appreciation in the rupee through operational efficiencies and other cost-cutting measures. The way IT stocks have behaved since the rupee started appreciating in March, it seems that the markets largely subscribe to that view. It’s the slowdown in the US that seems to be the larger worry. Going by the experience in 2001, when a short period of recession in the US had hit growth of IT firms sharply, the caution is not unwarranted.

India’s biggest private sector shipbuilder ABG Shipyard Ltd announced on Monday that it had received a demand draft for Rs6.49 crore from the union shipping ministry as ship building subsidy. Why is that important? Because it’s the first instance of an Indian private sector shipbuilder receiving a subsidy from the union government for building a ship. The payment was made almost four months after the shipbuilding subsidy scheme ended on 14 August, following a five-year run. The ABG Shipyard stock has gained 22% in just the past week.

Under the scheme, introduced on 15 August 2002, local builders were entitled to a 30% subsidy for building ocean-going merchant vessels that are more than 80 meters in length, if they are manufactured for the domestic market. For export orders, ships of all types and capacities were eligible for the government subsidy.

That means for building a ship priced at Rs100 crore, the yard would get Rs30 crore from the government. This subsidy was payable to public sector yards in instalments, while private firms were supposed to receive the aid after the ship is built and delivered to the buyer.

Private shipbuilders, such as ABG, Bharati Shipyard Ltd, Tebma Shipyards Ltd and Chowgule & Co. Ltd have raised subsidy claims of about Rs400 crore on the government for building and delivering ships during the five-year subsidy period. “How much of this will qualify for subsidy as per the guidelines of the scheme is being studied by the government," said a shipping ministry official, who did not want to be named.

Public sector yards such as Cochin Shipyard Ltd, Hindustan Shipyard Ltd, Mazgaon Dock Ltd and Goa Shipyard Ltd have already received subsidies worth more than Rs100 crore from the government in stages while constructing ships at their respective yards.

In the private sector, ABG alone has made a subsidy claim of about Rs100 crore for ships that have been delivered to the buyers and listed as receivables on the balancesheet.

As Rishi Agarwal, managing director of ABG Shipyard, said, now that the process of granting subsidies has started, the cash flows of shipbuilding firms will improve. A recent study undertaken by audit and consulting firm KPMG has argued for continuation of the subsidy.

“The scheme has enabled the fledging local shipbuilding industry to withstand unfair competition from global shipyards in Japan, Korea and China, which benefit from extensive support provided by their respective governments," said V. Kumar, managing director, Bharati Shipyard, and secretary, Shipyards Association of India. The momentum may be lost if the subsidy is withdrawn."

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Ashwin Ramarathinam contributed to this story.