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The Economic Times

IT stocks shine as depreciation in rupee helps improve margins

MUMBAI: A sliding rupee has come in as a big positive for India’s technology services providers, which are struggling with weak margins amid declining spending by big companies.

IT stocks have outperformed the benchmark in the last few weeks as every 1 per cent depreciation in the rupee against the dollar improves their earnings margin before interest and tax by 20-25 basis points, said analysts.

Tech Mahindra, HCL Technologies, Infosys, Tata Consultancy Services, NIIT Technologies, Hexaware, Mastek, Mphasis and L&T Infotech are some of the top picks of analysts.

The rupee depreciated by 5.3 per cent to 72.39 against the dollar in the past one month, its steepest monthly decline in six years. The BSE IT index gained 4.4 per cent in the same period, compared with a 1 per cent decline in the broader Sensex index. IT stocks such as Infosys, HCL Tech, Tech Mahindra, L&T Infotech and Hexaware have rallied between 5 per cent and 11 per cent.

IT stocks snip 1

Analysts believe the rupee weakening would result in margin benefits in the short term.

It would act as a “margin tailwind for the Indian IT service players while tight labour markets in the key markets are increasing cost structures”, said Sanjeev Hota, the head of research at brokerage firm Sharekhan. “However, the material rupee depreciation benefits will not stay for long term as it would be passed on to customers during contract renewals or bidding for new contracts,” he said.

With the NSE IT index’s returns consistently outperforming the benchmark Nifty over FY2018 to so far this fiscal year, the IT index is trading at +1standard deviation above its mean price-to-earnings readings for the past three years.

“In the current situation, IT is a safe sector, what we would advocate investors to take fresh positions in because the rupee depreciation is providing a cushion to IT company earnings,” said Mahantesh Sabarad, the head of retail research at SBICAP Securities.

Analysts remain optimistic about the demand scenario for IT services in the medium-tolong term, but see concerns over rising global macro issues.
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