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Information technology (IT) as a sector is way ahead of the nearest best performer on Dalal Street as the rupee cracked to a new record low of 72.67 against the dollar.
Global brokerage firm Macquarie believes that the sector does have the currency tailwind in an improving growth environment.
It further said industry trends continue to point to growth acceleration.
Macquarie upgraded Wipro and Hexaware to ‘Outperform’ on valuations.
It also prefers LT Infotech in the midcap space and HCL Tech, TCS, Infosys, Wipro and Tech Mahindra in the largecap basket.
The proof of the pudding is in the eating.
The BSE IT index has rallied over 40 per cent year-to-date, with Mindtree and Firstsource Solutions jumping 90 per cent and 84 per cent, respectively.
Zensar Technologies, Mphasis, LT Infotech, Mastek, KPIT Technologies, Tata Consultancy Services, Tech Mahindra and Infosys have also gone up 40-82 per cent during the same period.
The rupee has depreciated over 12 per cent so far this year.
BSE technology, FMCG, healthcare and bank indices have climbed 7-24 per cent so far in 2018 while other sectoral indices on the BSE are in the red.
Even as the rupee has depreciated, the impact of the same on immediate earnings will be a function of hedging.
Infosys has minuscule cash flow hedges of $300 million.
TCS hedges but through options, implying that it will realise the benefit unless the company has entered into range barrier options with the rupee depreciating beyond the range, according to market experts.
Mindtree hedges only the monetary assets and does not have any cash flow hedges.
On the other hand, Tech Mahindra and LT Infotech have hedged 70-90 per cent of net cash inflow over the next 12 months, resulting in no change in FY2019E EPS.
There are expectations that the sector may see more currency-led earnings upgrade in the near term.
Kotak Institutional Equities has already upgraded FY2019-21E EPS by 0-7 per cent on the back of economists' revision of INR/USD rate to 70-72, from 68.5-70 earlier.
“We also cut our USD revenue growth assumption due to cross-currency headwinds.
Infosys, TCS and Mindtree do not have meaningful cash flow hedges and will benefit immediately from the rupee depreciation.
LT Infotech (LTIT), Tech Mahindra and Mphasis are aggressively hedged and will not derive meaningful near-term upside.
We raise target price by 5-10 per cent on EPS revision and rollover.
Infosys, Tech Mahindra, LTIT and Mindtree are our key picks,” Kotak said in a report.
Brokerage firm Motilal Oswal Financial Services in a report said, “While the industry is secularly a winner in terms of absolute earnings as the rupee depreciates, relative benefits are another story altogether.
Three key aspects will determine the extent to which a company’s earnings are sensitised to currency fluctuations: mix of USD revenue bookings among other currencies, extent of onsite-offshore revenue mix – that will determine the net exposure after natural hedge and the hedging policy in terms of duration and proportion of the net exposures hedged.”
Based on an assessment of the above parameters, Motilal Oswal sees Infosys as most favourably placed and Tech Mahindra the least among tier-I IT companies.
In tier II, the brokerage firm expects Mindtree to gain the most and LT Infotech the least.
