Software cos buck market trend, head northward on Sebi cue

Software cos buck market trend, head northward on Sebi cue

Ahmedabad: Stocks of Indian software companies bucked the trend on the stock markets in the hope that the move by market regulator Securities and Exchange Board of India’s (Sebi) to curb foreign inflows would result in a depreciation of the ­rupee.

On Wednesday, the Bombay Stock Exchange’s IT index gained 1.02%, even as the exchange’s benchmark index Sensex lost 1.76%, and the 11 other sectoral indices of the exchange witnessed a drop.

The rupee has gained 15.8% since hitting a low of Rs46.99 to the dollar in July 2006. This year alone, it has appreciated by around 10.6%. That has wreaked havoc with the earnings of software companies because the largest market for such companies is the US.

Thus, even as the Sensex gained 6,260 points or 50% between 1 April and 16 October this year, the BSE IT Index has gained only four points or 0.0008%.

On Tuesday, Sebi announced curbs on overseas derivative instruments such as participatory notes (or PNs), an investment route for some amount of foreign fund inflows into Indian equities. In response, the rupee lost 0.49% to close at 39.54 to the dollar.

Shares of Tata Consultancy Services Ltd, India’s largest software services firm rose 2.53% to close at Rs1,095 each on BSE. Shares of Infosys Technologies Ltd rose 1.16% to close at Rs1,889.

The fallout of the rupee’s appreciation this year has been evident in the results of software companies for the quarter ended September. TCS’ net profit rose 22.8% year-on-year and 4.1% sequentially in the quarter, while Infosys’ rose 18.4% year-on-year and 7% sequentially. Both companies offset the rupee’s appreciation to an extent through hedges, better billing rates and improved productivity, but their earnings would have been more impressive had the rupee been weaker.

According to the IT industry, the US accounts for 67% of its revenue. The industry ended 2006-07 with $47.8 billion in revenue. Some analysts have claimed that a 1% appreciation in the rupee brings down the operating profit margin of IT companies by between 30 and 40 basis points.

Sebi’s move on PNs “means the government will not let the rupee appreciate rapidly," said Pankaj Kapoor, who tracks technology firms at Mumbai-based brokerage ABN Amro Asia Equities.

“With this, one of the worries is taken care of," he added.