Kotak Securities cautious on technology space

Kotak Securities has come out with its report on technology sector. According to the research firm rupee depreciation has driven stable stock performance for the Indian IT names despite material deterioration in yoy revenue growth trajectory.

Significant earnings deceleration ahead: Rupee depreciation has driven stable stock performance for the Indian IT names despite material deterioration in yoy revenue growth trajectory. This benefit may not last for long as the Rupee depreciation kicker to earnings will likely start to wear off from Dec 2012 quarter with companies potentially reporting a deceleration in earnings growth to even a decline on yoy comparison. Slowdown and increased competitive intensity drive our Cautious view on Tier-1 IT. Strong Rupee EPS growth has masked deterioration in core business: Divergence between US$ revenue and Re earnings growth (yoy) started in Dec 2011, a quarter where Rupee depreciation was noticeable and led to EBTIDA margin improvement. Acceleration in yoy earnings growth despite deceleration in revenue growth (Exhibits 1-4) has continued for the past few quarters, aided by Rupee’s sustained weakness. Sharp Re depreciation helped (1) absorption of cost inflation and pricing pressure, (2) robust translation-driven (US$ to Rupee) earnings growth and (3) prevent a material decline in stock prices. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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