The appreciation of the rupee, the dividend distribution tax and the hangover of the minimum alternate tax on information technology companies under the Software Technology Parks of India scheme have pulled the prices of IT stocks down by 12-30 per cent over the last month.
Almost all frontline IT stocks declined to their three-month lows over the last one week alone. They even underperformed the Bombay Stock Exchange's Sensitive Index. The BSE IT index declined 12.7 per cent from its peak of February 19 as compared to an 11.2 per cent fall in the BSE Sensex over its February 9 peak.
This is a clear omen that the revenue and profit growth of IT companies may take a beating in the fourth quarter and during the fiscal year 2007-08. While the rupee was down 1.6 per cent recently, its biggest intra-day slide in 11 years, it averaged 44.21 this quarter as compared to 44.41 in the corresponding quarter last fiscal, appreciating YoY by 0.45 per cent.
The rise threatens to reduce the Q4 profits by up to 40-60 basis points and revenue margins by anywhere between 1-1.5 per cent, say analysts. It is estimated there is a 30-40 basis points margin impact for every percentage change in the rupee.
IT majors, including Tata Consultancy Services, Infosys Technologies, Wipro and Satyam Computer are highly dependent on the US market with as much as 60-70 per cent of their revenue coming in dollars. Around 20-25 per cent comes from the UK and they have been working on a global delivery model, trying to derisk their business models by focusing more on Europe and Japan.
Analysts note IT companies that have not hedged the rupee satisfactorily will be the worst hit. When the rupee appreciates, they get fewer dollars in receivables. Wipro will be the worst hit since it reduced its hedging significantly this quarter, says Harit Shah, analyst (IT & Telecom), Angel Broking. Infosys, Satyam and TCS, on the other hand, have increased their hedging this quarter. Krupal Maniar, IT analyst, Emkay Research, concurs that IT firms may take a hit of 50-60 basis points in their net profit.
They both, however, add that since the fourth quarter has more working days, the impact should be less.
The signs are ominous, given the rise in wages, the appreciating rupee, the FBT confusion on employee stock options (ESOPs) and a (perceived) US slowdown in 2007-08.
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