MUMBAI: The Indian technology sector, hobbled by concerns over the US immigration bill, margin pressure due to rising employee and visa cost, lower growth, and deprecation of the rupee, may finally have something to cheer.
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The rupee has depreciated 9.87%, or Rs 5.35, against the dollar since April this year. According to analysts, this might translate into gains in operating profit by 100 to 250 basis points for the Indian IT companies.
Since Indian IT firms do a lot of back-office jobs for overseas entities, they get a substantial chunk of their revenue from the US. So, a rise in the dollar would translate into more revenue for them in rupees.
Also, the Indian technology companies, with the deprecation of the currency, are now better placed in global competitive markets to bid aggressively for overseas contracts at a lower price and pass on the benefits to clients. However, despite the positives, the Indian software majors are still worried about the immigration reform bill, under consideration in the US Senate, and if passed, it could potentially hit Indian outsourcing firms with higher visa fees, and eventually rise in employee cost.
"At present, the technology sector is being treated as a defensive bet. But the sector is likely to get re-rated as US discretionary spend is seen increasing due to improvement in corporate earnings," said Sonam Udasi, head of research at IDBI Capital.
"We expect order flow for companies such as TCS, Infosys, Wipro, and HCL Tech to improve. The technology sector will be preferred by portfolio managers as the risk downside is limited," Udasi added.
Around 52% of Tata Consultancy Services' business is centred around North America, while Infosys earns 63% of its total revenue from this region. These companies are likely to benefit most from the currency deprecation, according to analysts.
"We upgrade Wipro to 'buy' from 'hold' due to attractive valuations. We also like HCL Tech among the Tier-I vendors, and prefer NIIT Tech and Hexaware among the Tier-II companies," said Ashish Aggarwal, analyst at Tata Securities.
Last time, when the Indian rupee depreciated substantially in the second half of fiscal year 2012, the margin performances of Indian technology companies were mixed.
While margins of Tier-I companies' did not improve much, Tier-II vendors fared better. Analysts expect the same trend, this time round too. Tier-I Indian technology companies such as Infosys, TCS and Wipro are likely to plough back gains from the rupee depreciation into their respective businesses. Photos | Upcoming Movies | Filmography | Raanjhanaa
Source: Times of india