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Stocks of major information technology companies are seen rangebound with a negative bias in the next five sessions as the stocks enter a phase of consolidation after the recent surge, and as the domestic currency stabilise and strengthen. Technology companies have been trading positively since April, when the Indian rupee started slipping against the greenback. However, with the rupee strengthening over the last two days, we see come consolidation in the stocks. The overall weakness in the rupee is seen helping most IT companies report at least a 20-50 basis points expansion in operating margins in the near term. At a pre-quarterly analysts' meet held on Sep 6, Tata Consultancy Services said depreciation in Indian rupee against the dollar, recovery in the US, and greater penetration in European markets will help the company post a 275-350 basis points expansion in Jul-Sep margins. Company will likely report EBIT (earnings before interest and tax) margin of ~30% for 2QFY14 (Jul-Sep), the highest ever. While the company has not yet decided how to utilise the benefit of currency depreciation, analysts said that if the rupee remains at current levels, TCS will reinvest the benefits into the business over the medium term against offering discounts or passing on rupee benefits to clients. However, brokerage JP Morgan's Asia Pacific Equity Research division in a report said that IT companies that are desperate to preserve market share may resort to repricing significant chunks of their existing business. We think the volatility of the INR (rupee) will test the strategic decision-making skills of Indian IT companies. It can play testing psychological games with companies - not everyone will emerge from this a winner if some scenarios that we envision pan out.
Stocks of major information technology companies are seen rangebound with a negative bias in the next five sessions as the stocks enter a phase of consolidation after the recent surge, and as the domestic currency stabilise and strengthen. Technology companies have been trading positively since April, when the Indian rupee started slipping against the greenback. However, with the rupee strengthening over the last two days, we see come consolidation in the stocks. The overall weakness in the rupee is seen helping most IT companies report at least a 20-50 basis points expansion in operating margins in the near term. At a pre-quarterly analysts' meet held on Sep 6, Tata Consultancy Services said depreciation in Indian rupee against the dollar, recovery in the US, and greater penetration in European markets will help the company post a 275-350 basis points expansion in Jul-Sep margins. Company will likely report EBIT (earnings before interest and tax) margin of ~30% for 2QFY14 (Jul-Sep), the highest ever. While the company has not yet decided how to utilise the benefit of currency depreciation, analysts said that if the rupee remains at current levels, TCS will reinvest the benefits into the business over the medium term against offering discounts or passing on rupee benefits to clients. However, brokerage JP Morgan's Asia Pacific Equity Research division in a report said that IT companies that are desperate to preserve market share may resort to repricing significant chunks of their existing business. We think the volatility of the INR (rupee) will test the strategic decision-making skills of Indian IT companies. It can play testing psychological games with companies - not everyone will emerge from this a winner if some scenarios that we envision pan out.
