With a recovery looming in the US and the rupee’s slide benefitting the sector, information technology or IT stocks appear to be the silver lining in a volatile market.
“At present, currency is the biggest positive for India’s IT industry, as majority of the revenues are in foreign currency,” said Vinay Khattar, research head, retail capital markets, Edelweiss. “According to our calculations, for every 1% depreciation in INR against the USD, the margins of Indian IT companies increase by 30-40 basis points (100 basis points is 1 percentage point).
With the industry deriving 60% of its revenues from the US, the prospects of an US economic recovery is the biggest positive for the sector.
The rupee depreciation will likely prompt IT companies to go in for long-term research and development (R&D) activities as well, said analysts. “Weak rupee is allowing companies to invest in developing capabilities to cater to new technologies,” said Ashish Chopra of Motilal Oswal. This will benefit the industry in the form of better revenue growth in the medium-to-long term, he added.
The stocks are likely to sustain their rally, at least in the near term. “Sector valuations (excluding TCS) are in line with historical average, and we believe they can sustain given an improving demand outlook and receding risks,” said Ashwin Mehta and Pinku Pappan of Nomura.
“Our top picks in the sector include Wipro, HCL Technologies, Mindtree and KPIT Cummins,” said Khattar.