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The Falling Value of Rupee: An Opportunity in Disguise?

Published 13-07-2022, 03:59 pm
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A falling currency is a tell-tale sign of economic distress. The rupee has depreciated against the dollar by almost 8% in the last 6 months and it fell to a record low of 79.62. The country's trade deficit hit an all-time high in June at $25.6 billion, up from $24.3 billion in May. The record deficit was due to high crude oil and coal imports

Continuous withdrawal by foreign portfolio investors amid tightening monetary conditions has further put pressure on the domestic currency. Foreign portfolio outflows from equities stand at $6.6 billion in June itself, the highest since March 2020, taking the total outflows so far in 2022 to over $30 billion. 

Rupee depreciation hit corporates who source raw materials from imports which are predominantly paid in dollars for example paints, FMCG, Autos, etc. However, for the Indian IT sector, it is an opportunity in disguise. A significant portion of their revenues are earned in dollars and any depreciation would imply higher earnings in rupee terms. 

We will be discussing several sectors that will benefit from rupee depreciation starting with the Indian IT sector. So keep watching this space for more such analysis.  

SECTOR: IT

The Indian IT sector is predominantly export-led. Currently, more than 50 percent of the revenue of Indian IT service providers comes from the US. So, when the US dollar strengthens, Indian IT companies profit from forex gains. IT firms such as TCS (NS:TCS), Tech Mahindra (NS:TEML), HCL Technologies Ltd (NS:HCLT), Wipro (NS:WIPR), and Infosys (NS:INFY) have greater exposure to the US compared to the others.

Over the years, India has become a major hub for IT outsourcing on the back of cost-saving benefits, talent quality, and favourable policies. Nearly 80% of the US and European outsourcing firms prefer India for their outsourcing needs. Keeping this in mind, the following are a few stocks that one can keep on their watchlist:

Headwinds persist but are already factored in

In the current market condition, we have seen the IT sector touching a new 52-week low despite rupee depreciation owing to a dip in EBITDA margin. Lower margins have been due to high attrition rate, wage hikes, higher subcontracting costs, and supply-side challenges but the management is confident that these supply-side challenges will gradually ebb in the second half of the year. They have also guided that there has been no slowdown in demand or any deferral or cancellation of orders so far. While recessionary fears in the US have shaken the investor confidence in these companies, stock prices have already corrected and reached almost a 52-week low for several of these IT majors, there is a possibility that investors have already factored in all the above issues. Even if there is some slowdown in US and Europe, technology spending is not going to get impacted majorly. 

STOCKS TO WATCH

1. TCS:

TCS reported revenue of $6,780 million in Q1 FY23 — a sequential growth of 1.3% in reported currency and 3.5% in constant currency. Cross-currency headwinds played their part in the dollar-revenue growth. The year-on-year growth in constant currency was 15.5 percent.

The key market in North America whose share in revenue has increased from 49% in FY21 to 53% in FY23 which would eventually lead to higher margins because of currency depreciation.
TCS numbers
From the past year's performance, we can see decent growth from TCS but since there are looming clouds of recession in the US so we would suggest consulting an advisor to take an investment decision.


2. INFOSYS

Infosys is another company to watch out which has major revenue sources from outside India. Currently, the American market accounts for a meaty 65 percent; Europe is fast growing at 21 percent; and the rest of the world, 14 percent. 

 Infosys numbers
 Infosys is going to post the result this week. From the past result, it can be seen that Infosys is on a growth trajectory however one must be cautious due to current market conditions and see the movement for the right entry points.


Conclusion

Despite all the macro headwinds, the key drivers of technology spending are expected to remain intact. Spending on technology is often the core of an organization and is not discretionary. Both TCS and Infosys are giant IT behemoths providing end-to-end solutions to their clients. Even if there is a deep recession in the US, these IT players may feel a slight heat but it may not lead to large-scale spending cuts. The overall long-term journey of strong demand for technology is deeply intact.  

One has to pick stocks carefully and see fundamentally strong aspects of the company combined with the momentum of markets before making any investment decision. 
In the upcoming blog, we are going to research more on the topic and which other sectors will be placed at an important pivot due to the falling value of the rupee. 

Disclaimer - This content is purely for educational purposes. Consult your adviser before investing.

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