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Forex gains may bring significant earnings upgrades for IT stocks

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MUMBAI:A sharp fall in the value of the rupee may affect the Indian economy, but there have been significant EPS upgrades of IT stocks over the past few weeks as rupee depreciation will bolster FY2019 earnings of IT exporters, said analysts. India’s largest tech company TCS has seen a 3 per cent jump in its EPS estimates in the past four weeks, while Infosys’ EPS estimate has gone up by 1.2 per cent .

Mindtree’s EPS estimates has risen 9 per cent in the past 12 weeks while that of Tech Mahindra, KPIT Technologies, Mphasis and Firstsource Solutions have risen 7-8 per cent during this period.

The rupee has fallen nearly 7 per cent so far this year against the dollar. “The trend reversal in INR/USD could lower the forex hedge gains, but translation gains could be high,” said Pankaj Kapoor, analyst, JM Financial.

“We expect a net upgrade in consensus EPS estimates, though it could be more from the linear conversion of USD revenues into INR than a material uplift in margins.” Technology shares have performed the best so far this year as analysts are expecting a substantial bounce-back in revenue growth rates for Indian IT companies not only because of a fall of the rupee but also due to better-than-expected numbers from global companies such as EPAM, Luxoft and Accenture. BSE’s IT index surged 23 per cent so far this year, as against 3 per cent gains by the benchmark Sensex.

India’s biggest company in terms of market capitalisation, TCS, for instance, has given a 36 per cent returns since January 1. IT major Infosys’ shares have jumped 26 per cent so far this year.

Midcap IT stocks such as NIIT Technologies, KPIT Technologies, Zensar Technology, LT Infotech and Mphasis have gained between 40 per cent and 70 per cent in 2018. “At present, there’s an apparent premium for near-term growth visibility.

However, in at least a few cases, we believe the elevated valuations could be ignoring the business risks, and hence leave little scope for a disappointment,” said Pankaj Kapoor of JM Financials. Earlier this week, Accenture had raised its revenue growth guidance to 9.5-10 per cent from 6-8 per cent in Q1FY18, the highest in the last five years.

Other than the rupee, factors such as good results by global IT majors and growth in BFSI sector indicate towards a substantial improvement in demand environment for Indian IT companies, said analysts. “Our on-ground surveys, the Q4 FY18 numbers, management commentaries, results of global companies such as EPAM, Luxoft and now Accenture unequivocally indicate demand revival led by robust digital adoption and global recovery,” said Sandip Agarwal, analyst, Edelweiss Securities.

“We continue to maintain the positive stance and expect a substantial bounce-back in revenue growth rates for Indian IT companies.” Analysts advised playing the sector recovery through companies such as Infosys, Tech Mahindra, HCL Technologies, NIIT Technologies and LT Technologies Services where relative valuations are still inexpensive even though they may lack near-term triggers.




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