Weak rupee not enough to rescue India IT firms        
June 13, 2008
Source: REUTERS

BANGALORE: Facing shrinking orders from their top market, the United States, Indian IT outsourcers cannot rely on a weakening rupee currency to subsidise earnings and lift share prices out of the doldrums in the long run. 

The rupee's strength against the dollar has long been the bane of information technology companies, such as Infosys Technologies, because although the bulk of sales are made in dollars, their expenses are incurred in rupees, squeezing their margins. 

The rupee's 8 per cent drop against the dollar this year has given shares in India's No 2 outsourcer and its rivals a temporary reprieve, but analysts argue its weakness is not enough to provide lasting relief in the face of a US economic slowdown. 

With an army of English-speaking workers and relatively cheap wages, technology exporters such as Infosys and Tata Consultancy Services have thrived on winning deals from overseas clients -- the majority of which are in the United States. 

The party ended last year when Wall Street banks, some of whom are Indian IT companies' major clients, began to announce staggering write-downs related to the subprime mortgage crisis, and the wider United States economy headed towards recession. 

Only this week shares in U.S. investment bank Lehman Brothers plummeted on concerns over the potential for further credit-related losses. 

India's software and back-office services companies will see slower revenue growth of 25 percent in the current fiscal year to March, down from an estimated 29 percent in 2006/07 and more than 30 percent in previous years, according to lobby group National Association of Software and Service Companies. 

"We feel that there is still pain left to be seen in the sector and expect more headwinds to make headlines," Sanjeev Hota of Reliance Money, which has a "hold" rating on all the top four IT services companies, wrote in a research report. 

The big four Indian software firms missed market estimates for net profits in the last quarter and issued cautious outlooks. 

Profits had soared in the past, as increasing numbers of U.S. companies looking to cut costs and boost efficiency placed orders, while a weak rupee boosted margins. 

In 2007 the sector index fell 14 percent against a wider benchmark 30-share index that rose more than 47 percent, as the rupee surged more than 12 percent against the dollar towards 10-year highs and fears of a U.S. recession emerged. 

In the short term, the weaker rupee has boosted outsourcers margins. 

The leading outsourcers earn more than half their revenue in the United States, and analysts say every 1 percent rise or drop in the rupee impacts the profit margins of Indian software services firms by 30 to 50 basis points. 

"Currency has been a major headwind for the performance of IT companies," Motilal Oswal Securities said in a report. "Now, with the rupee reversing its appreciating trend and depreciating ... we believe one critical headwind has weakened." 

The rupee was trading at around 42.82 a dollar on Thursday, well below last year's close of 39.41, and most of its losses have come since the new fiscal year started in April. 

Calyon Bank expects the rupee to fall as low as 44 per dollar by September, and JP Morgan sees it weakening to 45 per dollar, with risks for an even sharper fall, by the end of 2008. 

Motilal upgraded its earnings estimates for top software firms to factor in the weak rupee and the tax holiday extension. 

It increased its earnings per share (EPS) target for New York-listed Infosys, which has a market value of about $27 billion, by around 3 percent to 97.3 rupees. Motilal also raised its EPS targets for Tata, third-ranked Wipro, No. 4 Satyam Computer Services by between 1.5-6.5 percent. 

Harit Shah of Angel Broking said if the rupee remained at current levels, it would boost the earnings of companies such as Infosys and Satyam, who had assumed the rupee at about 40 to a dollar in their forecasts for 2008/09. 

"The recent rally in the Indian IT stocks has been led by the sharp depreciation in the rupee," Manik Taneja, sector analyst with Emkay Share & Stock Brokers, wrote in a report. 

"However, despite the early cheer from the currency benefit, it is imperative for investors to refocus attention on the macro demand environment front, as they are bigger driving factors for financials of the companies."