Depreciating rupee giving new life to IT stocks. Will this happiness last? – Blue Barrows

Notwithstanding the rupee’s plunge to historic lows against the dollar, IT stock investors have apparently ignored all the worries related to margin compression and demand moderation.

IT has been the worst performer so far in 2022 with the Nifty IT index having lost around 31% of its value against Nifty’s 2% loss during the period. However, when the Nifty eroded around 1.8% of its value on Monday, the index was the only beacon of hope in a sea of red.

Analysts have cautioned that economic slowdown and a recession looming in the US and Europe will hit the margins of India’s software exporters hard. But the sharp depreciation in the rupee is now acting as a tailwind for the sector.

IT majors like TCS, Infosys, HCL Technologies, Wipro, Tech Mahindra and Mindtree that earn a bulk of their revenues in dollar terms are likely to benefit from a weakening rupee. The domestic currency touched a record low of 81.65 on Monday against the safe-haven dollar.

Analysts are of the view that the price mostly factors in the global recession and IT stocks are now trading at reasonable valuations.

On a year-to-date (YTD) basis, Wipro, Coforge and Tech Mahindra are down about 42-45%. TCS has lost around 20% of its market value, Infosys and HCL 27% and 31%, respectively.

Hiren Ved, CEO, Alchemy Capital Management, said IT stocks underperformed on fears of lower tech spending due to recession in developed markets like the US and the EU. “As long as the multi-year cycle of increased outsourcing and higher spends on specialised IT services firms remain intact, we will continue to invest in IT,” he said.

The current momentum in IT stocks may, however, prove to be short-lived for those tapping the sector to earn a quick buck even as the long-term growth story remains intact.

Sandeep Bhardwaj, CEO, IIFL Securities, said a slowdown or recession would adversely affect India’s exports as demand for goods and services would begin to dry up. “Hence, for the medium term, we should expect higher volatility in IT stocks,” he said.

Global brokerage firm Jefferies has stated that Accenture’s quarterly revenue growth of 22% YoY suggests strong growth for Indian IT firms in Q2. “Its FY23 organic growth guidance of 5.5-8.5% YoYcc, is below our 14%/8% YoYcc growth expectation for Indian IT firms for FY23/FY24E, which could pose risk to our FY24 estimates. With sector valuations still at a 10% premium to 10-year average levels, we remain selective, with Infosys our only pick in the sector,” it said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)