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Stocks of major information technology companies are seen in a range over the next few sessions as we expect some stability in the Indian rupee going forward following the sharp depreciation this week. The rupee fell to an all-time low of 58.98 a dollar on Jun 11, and ended at a record close of 58.39 a dollar. Yesterday, the rupee ended at 57.51 a dollar. Since May, rupee has depreciated over 7% against the US currency on speculation the US Federal Reserve may soon wrap up its $85 bln monthly asset purchase programme. Investors will eye Infosys and Wipro after the companies, on Thursday, announced salary hikes for their employees. Infosys said it will hike salaries in India by average 8% with effect from Jul 1, while the hike for employees who work at client sites overseas and whose salaries had not been increased in January, will be at an average 3%. The company also said its global sales force had received an average salary hike of 8% effective May 1.
While the compensation hike will boost employee and investor sentiment, it is likely to hit margins. As per our analysis, the announcement will have an impact on EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 150bp (basis points). However, the same will be more than offset should the currency stay at current levels. Our estimation Infosys' earnings before interest and tax margins for 2013-14 (Apr-Mar) to remain unchanged at 24% with the rupee depreciating to 56 rupees against dollar from 54 rupees earlier. Further, despite a weak growth year for the industry in 2012-13, Infosys' annual attrition remained high at 16%, as against peers, including Tata Consultancy Services and Wipro, and this along with currency depreciation is a likely factor behind the wage hikes.
This is the second round of hikes the company has given within 12 months. In October, the company had given an average 6% increment to its offsite employees, while its onsite workers had received a 2-3% hike with effect from Jan 1. We see the move, which comes on the heels of the company re-appointing founder N.R. Narayana Murthy as its executive chairman, as a step to improve employee engagement and boost the overall revenue growth for the company. We also expect the company to implement stricter performance measurement methods. We can likely see more forced attrition and an improvement in the productivity levels of the company, going ahead. It is also possible that the revenue growth may see a boost, especially due to better sentiments and morale in the sales team.
Wipro also hiked salaries in India by an average 6-8% with effect from Jun 1, while the wage hike for onshore employees was in the range of 2-3%. Stocks of Infosys will also get a boost as Infosys Public Services, its US subsidiary, said it has received a three-year contract from CareFirst BlueCross BlueShield to support the latter's information technology operations and to provide application development. However, Wipro's stocks may be hit as the company, on Thursday, said it had received a "draft assessment order" in March with a demand of 8.16 bln rupees from the Income Tax Department related to the financial year ended March 2009.
