Strong rupee haunts IT stocks

Tue, 30 Mar 01:30 pm

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Profit booking led the Indian markets to drop to the neutral zone during the second of the previous hour of trade. While stocks from the healthcare and IT spaces continue to drag the markets lower, those from the realty and auto spaces are amongst the top gainers. Stocks from the banking and capital goods sectors are amongst the lowest gainers.

BSE-Sensex is trading higher by 5 points while NSE-Nifty is trading lower by 6 points. BSE-Midcap Index is up by 0.6% while the BSE-Smallcap index is trading higher by about 1.2%. The rupee is trading at 45.03 to the US dollar.

Indian IT stocks are at the receiving end on BSE today. IT majors like TCS, Infosys and Wipro are trading lower by 1% to 2% on BSE currently. The Indian IT sector which exports over 55% of its services to the Western clients in the US and Europe, are always prone to foreign exchange currency fluctuations. It is widely believed that a 1% movement in rupee-dollar rate, impacts the operating margins by 0.4%. Rupee which is at around 45 for a dollar has appreciated as much as 4% in the last 2 months, thereby impacting the operating margins of Indian IT majors by around 2%. Though this appears to be a cause of worry for the investors in IT stocks, it might well be noted that this is the normal way of business for the export oriented sector. We believe that all the major Indian IT companies are adequately hedged against such normal currency fluctuations. While forex volatility remains a critical risk one must deal with, in constant currency terms, the prospects for the Indian IT sector remain very bright going forward.

Engineering stocks are currently trading mixed with Crompton Greaves, Suzlon and Elecon Engineering leading the pack of gainers, while Blue Star and L&T are trading in the red. Electrical equipment manufacturer, Crompton Greaves recently announced that it has acquired UK based Power Technology Solutions (PTS) for a consideration of 30 m pounds or about Rs 2 bn. PTS is a high voltage electrical engineering company providing consultancy, technical and engineering support to regional electricity companies. While not many details are given with regards to the financials of PTC, funding this acquisition should not be an issue for the company as company a good amount of cash on its books. This move will help the company to significantly increase its presence in the electrical engineering sector in the United Kingdom.