1% Re depreciation to benefit IT cos by 1.5%: JP Morgan

Bhavin Shah of JP Morgan said 1% depreciation in the rupee leads to 1.5% or more benefit to the bottomline of IT companies. "But because of the large hedging positions that companies take and how those positions evolve during the quarter, it is very difficult to guess where the currency impact in terms of the currency loss or gain is going to go. From revenue perspective, there is direct benefit that is bound to be there."

Excerpts from CNBC-TV18’s exclusive interview with Bhavin Shah:

Q: Do you see a meaningful impact for the business prospects for Indian IT makers because of this combine? What kind of market share might they have?

A: In the short run, Indian IT companies might benefit during the integration process between HP and EDS. There is some opportunity to grab business. In the longer-term though, the HP and EDS combine emerges as a very strong player after IBM. They certainly have a very large presence in India, with the total staff of close to 60,000 people. So, it makes them a strong new competitor in addition to Accenture and IBM.

So, there is a little bit of comparative pressure on the Indian IT companies. But the large companies are themselves very well positioned and should not be affected by this.

Q: The eye over here has been on MphasiS without getting into specifics. What is your sense given the historical trends of how things usually go about? Does the company that is so large, when it has a couple of subsidiaries in various geographies, try to consolidate operations and look at operational delisting of some of these stocks?

A: HP, in the past, tried to delist one of its subsidiaries. So, that could be one potential action that HP could take overtime. So, delisting is certainly a possibility.

Q: What have you made of the rupee’s movement? What are you penciling, in terms of the impact, it can have on IT stocks this quarter around?

A: Clearly, rupee depreciation is positive for the Indian IT companies although most of them have very large hedge positions. They still benefit from the translation at a higher dollar-rupee rate.

Obviously, in subsequent quarters if the rupee stays around this level, it helps them further. Indian IT stocks have reacted positively to the rupee movement as well as the extension of tax benefits. But where the rupee goes from here is not something that I would like to guess.

Q: Is it too early to look at any sort of revision in their quarterly performance which can impact their full-year numbers?

A: We have not really put our hands around that yet. There is a disproportionate benefit of rupee depreciation. Obviously, 1% depreciation leads to 1.5% or more benefit to the bottomline.

It is very difficult to guess where the currency impact, in terms of the currency loss or gain is going to go, due to the large hedging positions that companies take and how those positions evolve during the quarter. From the revenue perspective, there is direct benefit that is bound to be there.

Q: What are your preliminary thoughts on what these sort of cases mean for IT stocks like Satyam?

A: I really do not want to give my opinion on this subject because it is a legal matter. But when there is an issue of forgery, it goes beyond the normal customer to client relationship and opens a whole new set of issues.