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10:51 2006/06/18
Rupee drop may lift software scrips
NEW DELHI: Shares of Indian software makers Infosys Technologies Ltd and Wipro Ltd tumbled along with the country??™s markets. They are rebounding as the declining rupee boosts overseas sales.
Investors can profit by buying software shares now, said Paras Adenwala of ING Investment Management (India) Pvt.
A 22% drop in the benchmark Sensitive Index since May 10 has made the stocks cheaper relative to earnings. The rupee??™s drop versus the dollar will lift profit because the companies get about 60% of revenue from the US.
???The valuations have corrected to some extent and the rupee has weakened,??™??™ said Adenwala, who manages $500mn as chief investment officer of the Mumbai-based firm. ???The fall in the rupee will work to the advantage of software stocks.??™??™
Adenwala said he plans to buy software stocks, without identifying which ones.
The rupee has fallen about 2.89% against the dollar since March 31, its biggest quarterly decline in two years. Each percentage point drop in the Indian currency leads to a gain of as much as 40 basis points in operating margins, according to a Morgan Stanley research report published on June 14. One basis point is 0.01 percentage point.
This quarter, the rupee has depreciated 6.9% and 8.9% against the euro and the British pound, respectively. India??™s biggest software companies earn more than a fifth of their sales from Europe.
Technology shares account for about a fifth of the Indian market??™s value. The Sensex, up 34% at its May 10 peak, was 5.2% higher this year. The index rose 6.9% on Thursday, its biggest jump in two years, followed by a 3.6% gain on Friday.
Bangalore-based Infosys, the second-biggest Indian software company, has fallen 16% from its record close of Rs3,335.3 on April 18. The stock on June 14 reached 2,450, a low for the year.
The decline came even though the company on April 14 said earnings per share may rise as much as 28% in the year to March 31, surpassing the average forecast from three analysts. Infosys??™s forecast assumed an exchange rate of Rs44.48 per dollar, compared with the current level of Rs45.85.
Infosys, which has the second highest weightage on the Sensex, rose 13% in the past two trading sessions. The stock sells at about 19 times its estimated earnings for next fiscal year, down from 23.9 times when the shares peaked in April.
Similarly, Bangalore-based Wipro, the nation??™s third biggest software company, trades at a price-earnings ratio of 18.5, down from 23.9 in April.
Mumbai-based Tata Consultancy Services Ltd, the largest, is trading at about 17.7 times earnings, versus 23.8 in May. Lower valuations may not be enough to stop the stocks??™ slide immediately.
India??™s market drop may weigh on technology shares further as overseas investors retreat from emerging markets, said Apurva Shah, vice president of sales at Mumbai- based brokerage Prabhudas Lilladher Pvt. Markets declined from their peaks in May on concern that higher interest rates around the world would slow economic growth and deter investors from riskier assets.
Morgan Stanley Capital International??™s Emerging Markets Index this week slid to the lowest in more than six months. The index is down 20% since May 8.
???The foreign institutional investor is working on behalf of other investors,??™??™ said Shah. ???If the investor becomes risk averse and pulls out of the market, the volatility in stock prices will continue.??™??™
Funds investing in emerging-market equities lost $8.4bn from withdrawals in the three weeks ended June 7, according to Brad Durham, managing director at Boston-based Emerging Portfolio Fund Research, which tracks 15,000 funds with more than $7tn in assets.
Salaries at Indian software companies have risen by an average of 15% in the past two years, somewhat blunting the cost advantage of doing work out of the South Asian nation. Infosys said on April 14 it raised salaries by between 14% and 15% for employees in India, after a similar increase last year.
The software maker is optimistic operating margins won??™t narrow because of rising wages.
The rise in Indian salaries accounts for between 1.6 and 1.8% increase in costs annually, Nandan Nilekani, chief executive at Infosys, said in an interview in Tokyo on Friday. Nilekani said improving productivity and sales of more profitable services such as business consulting will help counter pressures on operating margin.
Infosys, which had a total of 52,715 workers at the end of March, plans to hire 25,000 in the current year. Still, business prospects remain intact for Indian software companies that depend on orders from companies in the US and Europe, said ING??™s Adenwala. ???Business is not an issue at all; it continues to be very strong,??™??™ he said.
Infosys has recorded average annual sales growth of more than 38% in the past five years. The strength of this quarter??™s profit growth for Indian companies may surprise investors and improve sentiment toward the stock market, said Viswanathan Vasudevan, who helps manage about $200mn at Aquarius Investment Advisors Pte in Singapore. He owns software stocks and plans to buy more, he said. ??“ Bloomberg
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