Rupee fall to help IT sector post impressive quarterly results

The fall in rupee will result in a windfall for the Indian IT firms with a majority of them expected to post better-than-expected first quarter results-that too at a time when companies across sectors are bracing up for a negative impact.

However, the euphoria could be shortlived when new contracts will be signed under the existing dollar-rupee exchange rate.

"In the short-term, the slide in rupee will be good for IT companies as it will bring in additional revenues to them, and the first quarter results would be slightly better than their guidance. However, this might not help in a rally of stock prices of these companies," Ankita Somani, sector analyst, Angel Broking, said. "The revenues, we expect, will be slightly better than the guidance…," Somani added.

Infosys Ltd had provided an almost flattish guidance of zero to one per cent rise in revenues on a quarter-on-quarter basis for the first quarter ending June 30 while Wipro had provided a slightly better revenue guidance of one to two per cent.



Cognizant Technology, which follows a calendar year, has provided a guidance of 4.7 per cent rise in revenues for the June quarter. Most other listed IT firms were also expecting a slight to modest rise in Q1 revenues.

According to Kishor P. Ostwal, chairman and managing director, CNI Research, "The fall in rupee is good for IT companies, at least ,in the immediate quarters as orders have begun flowing again from across the world after a lull."

"Traditionally, the first quarter is good for the IT sector, and this time the June quarter will be better compared with previous years good due to the depreciation in rupee. I don't see any problem for the sector unless the rupee comes to the 50 level…. 54-57 levels are good for the sector," Ostwal added.

The rupee had fallen to a record low of 56.40 against the dollar last week on withdrawal of funds by foreign institutional investors and a widening current account deficit (CAD).

The CAD went up to four per cent of GDP in December 2011 from 2.6 per cent in March 2011. The fall in rupee was arrested following the Reserve Bank of India's intervention. On Tuesday, it was closed at 55.67 down 48 paise from Monday's close.

According to rating agency Moody's, the falling rupee will impact Indian firms that have large foreign currency repayments scheduled this year as the depreciation of rupee would raise the cost of paying back foreign currency borrowings. India's total private sector external debt is low 16 per cent of the GDP.

However, for the IT companies, sustaining the gains in the long run would depend on the new contracts they sign. "With some of the companies expected to sign new contracts or renew existing ones, the benefits of the depreciation would be taken away," Somani said. "The impact would be visible in the second or third quarter or by the later part of the year," she added.