Falling rupee cold comfort for IT companies

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Falling rupee cold comfort for IT companies

The unprecedented slide in the rupee may be giving importers sleepless nights, but exporters-especially IT firms—don’t have much to cheer either.

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Moneycontrol Bureau

The unprecedented slide in the rupee may be giving importers sleepless nights, but exporters-especially IT firms-don't have much to cheer either.

Ideally, a weak rupee-and by extension, a strong US dollar-boosts exporters revenues and margins, since they earn in dollars. But if there is concern about the revenues itself, a favourable currency is not of much help.

IT shares were up 1-3% on Tuesday, though analysts are circumspect about the companies' earnings prospects.

"Rupee depreciation is good, but demand concern is a bigger issue...We remain cautious on the IT sector," said Abhishek Shindadkar of ICICIDirect.com.

If anything, the weakness in the rupee will merely serve to cushion the pressure on revenues.

As Viju George, ED at JP Morgan put it, "the rupee has been a god send in this environment for IT companies."

The rupee depreciation will certainly boost margins in the third quarter, seasonally a weak quarter for IT firms. But going forward, the debt crisis in the Euro zone and the economic slowdown in US will weigh on IT companies' earnings, as customers tighten their purse strings.

On Monday, the country's second largest software services exporter Infosys warned to that effect that it will be difficult to meet the top-end of its revenue guidance for the third quarter and the current fiscal, given the current uncertain environment.

"We have not revised guidance for now, but it should not be a surprise if we fail to meet [upper end] or remain on the lower end of the guidance," CFO V Balakrishnan told CNBC-TV18, adding that customers were getting cautious about spending.

Infosys had earlier forecast 17-19% growth in US dollar revenue for 2011-12.

Analysts don't see any positive surprises from Infosys in the third and fourth quarters, and warn of a slowdown in the sector if the economic turmoil persists.

"The tone among IT companies has changed. There have been no project cancellations yet, but project starts are getting pushed out, especially from some European customers," ICICIDirect's Shindadkar told moneycontrol.com.

Other analysts too echo similar sentiments.

"The macro economic uncertainty is the most important factor," said Hardik Shah of KR Choksey Shares and Securities.

He told moneycontrol.com that discretionary spends remained an issue and feels clients will likely re-look at cutting some of their huge IT spends, if economic worries persist.

Shindadkar says Infosys and Tata Consultancy Services are the only stocks worth investing in the IT sector, and that too on sharp declines.

Nachiket Kelkar
nachiket.kelkar@network18online.com