The IT pack was a frontrunner in yesterday's rally after a very long time. This after the government announced ECB curbs to rein in the rupee. Most IT companies have their billings done in IT terms and any appreciation in the rupee spells havoc on their margins. So, yesterday's ECB move came as a relief for IT companies after a long time.
Tech biggies like Infosys and TCS were the frontrunners in the Sensex rally till 13,000. However, they had somewhat stayed out of the rally in the run up to above 15,000 and were up just about 2%. Even the first quarter numbers of IT companies were just inline with market expectations and were rather lackluster. Some companies had also revised their guidance for FY08 and are taking drastic measures to improve margins.
Despite what seemed like a breakout for tech companies yesterday, analysts are not so upbeat on the sector in general.
Nilesh Shah, MD and CEO, Envision Capital, expects the IT sector to remain an underperformer for the next three-six months. "I would still continue to be cautious on the sector. What is happening in the sector is more of a relief rally. Investors need to use these kinds of rallies to cut positions and exposures at every high level. Another 5% move and the entire pack are going to look reasonably expensive. The rupee has started to give up some of its gains but it is still a long way off from where it was 3-6 months back. What is more disturbing is the volatility and most top tier IT companies would not be able to capture this volatility and be able to manage their dollar portfolios. In the short-term, there are some kinds of gains to look forward to, but I would still continue to be very cautious. I expect IT to remain an underperformer for the next three-six months," he added.
Anish Damania of Emkay Stock Brokers feels the earnings growth of IT companies will be muted in relation to volume growth. "In terms of technology, we feel that once again things have not changed structurally. You might still see the rupee coming back to these levels. We feel the earnings growth will remain muted in relation to volume growth, which they are having. Technology will still be underweight on that," he added.
Dipan Mehta, Member of BSE & NSE, said he is underweight on the services segment of the IT industry. "We would still like to be underweight on the services segment of the IT industry, although we are extremely bullish on software product companies and other IT-led businesses within that industry. Within the services industry, we do not think that they are out of the woods. There could be a likelihood of negative surprises in a lot of these software services businesses, from which we would like to stay away. No doubt they are great companies, have got great momentum going there, but I think for the year or so they will be impacted by circumstances beyond their control that being the rupee movement versus all global currencies. Also, the fact that they are not getting adequate increases in pricing and also wage inflation has not come down to comfortable levels. So, they have some way to go before we see them posting increases in the bottomline and operating profit margin increases which are generally expected from that sector. One needs to be a bit selective within this sector," he added.
Sanjay Sinha, CIO of SBI Mutual Fund, said the rupee appreciation is a concern for IT companies. "The rupee appreciation is a cause for concern as far as the tech sector is concerned. We have one comfort in terms of the volume growth and there the guidance from almost every company has been that they see strong dollar revenue growth in their earnings. They have no control on the rupee appreciation and going by the way global economy is now panning out, the long-term trend for the rupee to appreciate is very much there," he added.
There is a long-term trend for rupee appreciation, he said, adding that the worst in terms of a rupee appreciation impact is factored into the price.
"We have to look into the scenario that is about medium to near long-term which is about 6-12 months. The way RBI has been intervening in terms of propping up the rupee every time it comes close to Rs 40, gives me the indication that as far as the tech sector is concerned the worst in terms of the impact of the rupee appreciation is already there in the price. So, if the rupee does tend to depreciate a bit from here or even trends up to Rs 41.5, the outlook for the tech sector will become brighter. At this point of time, if one has to play the tech sector the stance could be moderately cautious with a view on the rupee. If one wants to play it on the long-term, one will have to have a clear view as to where the rupee will stay and at what range, with the upside capped at Rs 40 and not beyond," he added.
The 
Anish Damania
Dipan Mehta
Sanjay Sinha
