IT Stocks freefalling despite the Rupee depreciating a record 25% this Year…Why ?

The BSE IT Index opened this Year in January at 4519 and today it has recorded an intra day low of 2566

In just over Nine Months this Year it has plunged by 43 %

How did this happen despite the Rupee depreciating a record 25% against the Dollar this Year.The Rupee was at Rs 39 to the Dollar earlier in the Year and today is threatening to touch Rs 49 to the dollar

The IT Sector is clearly an Export Oriented Sector and major revenues are in Dollars.The leader ,Infosys receives nearly 70% of it’s revenues in Dollars…so any rupee depreciation should add to the Bottomline 

The reasons for the IT Sector plunging too despite the Rupee Depreciation are several

  • There has been  an overall market crash and the healthy P/E Multiple ratings of 25 to 30 range for the IT Leaders have slipped into the 11-15 range 
  • There is a US Recession underway and the BFSI Sector has simply collapsed in the USA. Major Financial Houses and Banks in this Sector in the USA have been the Major Revenue Source for Indian IT Companies…Revenues from this Source have dwindled considerably 
  • When the Rupee had appreciated to below Rs 40 to the Dollar earlier in the Year most IT Companies preferred to play safe and had significantly increased their hedging exposure to combat this currency risk expecting the rupee to strengthen further .They are therefore unable to take advantage of this Rupee Depreciation that an unhedged position would have allowed them to.
  • Facing a Recession,US and Europe Companies have substantially trimmed their IT Spending Budgets…thus there is less Business and more Competition.Many existing clients have been renegotiating with IT Companies to scale down existing rates
  • Incremental Staff Costs on account of New Hiring  and Raise in Salaries is also affecting the margins of IT Companies affecting Earnings and therefore Valuation   

Clearly there is Consolidation visible in the IT Sector and the way forward adopted to sustain growth and scale has been through the inorganic route…Two major Deals have taken place….HCL Info has outbid Infosys to take over Axon, UK and just today TCS has announced a US $ 505 million takeover of Citibank’s BPO Operations in India 

 

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