R Ravi of Karvy Stock Broking said if the rupee depreciates by 3-4%, we might see a significant upswing or expansion of margins by more than 120-160 bps.  He told CNBC-TV18 that he is very positive on 3i Infotech because they are doing quite well. He is also positive on Firstsource, Subex and Mastek because they have got a business model in place and they are throwing free cash. The return ratios are also quite satisfactory, he stated.

Excerpts from CNBC-TV18’s exclusive interview with R Ravi:

Q: What are you factoring in a sustained depreciation of the rupee? In that case, what are your calculations looking like for IT stocks?

A: At this point of time, I have assumed an appreciation of 1.5% over last year’s average. So, I continue to maintain 1.5% appreciation for the whole year. But if this trend continues, the rupee reaches 42 levels and based on how companies perform, I may have to revise it to around Rs 42 for the year.

The moment the rupee depreciates by around 3-4%, what is going to come out as a big positive in Q1 is that we might see a significant upswing in margins or expansion of margins by more than 120-160 bps.

Margin expansion has been the most difficult factor for all IT companies over the last six quarters, which could be on account of rupee or wage. If the rupee depreciates by more than 5-6% in a single quarter, then we could see a significant margin expansion. Infosys was supposed to report a flat to negative growth in Q1 and this could be a blessing in disguise.   

Q: Would you go ahead and buy your favoured IT stocks?

A: I still continue to have a buy rating on Infosys. I have not revised my earnings because I need to see the trend of the rupee and how outsourcing from the US is going to come out. I have a price of Rs 2,250; we have upgraded the price target from Rs 1,950 anticipating rupee depreciation.

People were seeing an interest rate differential between India and the US last year. This year, people are going to see inflationary differential between India and US. This is going to widen which is going to put pressure on the rupee as we go forward into Q2 and Q3.

Q: Would that mean that things could get even more attractive from hereon?

A: Absolutely. That means more and more people will come into the IT sector. In terms of sector rotation also, people who actually underweight or neutral on IT may come into the sector. More importantly, the visibility of earnings will also come in because the rupee will also aid earning significantly. We are getting around 20% growth from volume itself and any increase in depreciation of the rupee will also give much breather to the sector.   

Q: Are there any picks in the midcap space?

A: I am very positive on 3i Infotech because they are doing quite well. I am also positive on Firstsource, Subex and Mastek because they have got a business model in place. They are throwing free cash and the return ratios are quite satisfactory for me at this point of time. The margins, which were declining a little last year will probably return on the back of rupee depreciation.