Strong rupee may hit IT majors guidance: CLSA

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Strong rupee may hit IT majors guidance: CLSA

CLSA has come out with a report on the likely impact of the appreciation of rupee in the recent past on the guidance of Indian IT majors.

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CLSA has come out with a report on the likely impact of the appreciation of rupee in the recent past on the guidance of Indian IT majors.

CLSA Report on Rupee appreciation:

Rupee rocks techs
From friend to foe, all in a few months

Infosys FY08 guidance (due 13th April) will be based on the closing INR value on 31st March, 2007, as per company norm.

Given the current trend of the Rupee, this might well be one of the strongest levels for the Rupee in many years. A major move in the INR post 31st March may force Infosys to change its usual benchmark day, but the following issues remain pertinent:

• The margin of comfort for a positive EPS guidance number is shrinking.
• From Mar07 to Mar08 quarters, if the company does 7%-1%-9%-9%-9% QQ EPS growth, FY08 EPS will grow ~31%YY, just meeting the current street consensus.
• Since our note "Waiting for Godot" (14th Mar), the Rupee has appreciated from Rs44.25/$ to Rs43.05/$ on 28th Mar. There is reason to believe that (a) Infosys guidance will be lower than last year, (b) a 25% EPS growth number is looking like an optimistic scenario. 22-23% is more realistic.

How about March quarter impact? Here too, companies are differentially positioned. Wipro is at high risk of net loss in other income line. TCS, HCLT and Satyam are better off.

• Wipro reduced its forex hedges by 50% from end-Sep06 to end-Dec06. Clearly, this is a forex call gone wrong. Infosys marginally reduced its overall hedges by 4% and its $-hedges by 13% in the same period.
• TCS and HCLT raised hedges by 14-15% from already healthy levels. Both are well placed to neutralise end of period impact on asset translations.
• Satyam increased its hedges by 60%, and has further raised hedges in to the current quarter. Satyam is well placed to ride out the Mar07 quarter.

Apart from hedges, invoicing share also differs. Lowest exposure to US$-invoices (different from revenues), is for HCLT and TCS.

Currency and weighted average impact varies from 1.20-1.48% on an average for the quarter basis, and between 2.3-2.6% on an end of period basis. Wipro, given higher end of impact and lowest forex hedges, looks worse off on this metric.

While all tech stocks have moved in sync with Infosys guidance around the relevant dates, we think individual company-wide factors will hold sway thereafter.

Relative to modest 23% FY08 EPS growth consensus expectations from Satyam, we see positive risk-reward in this stock.