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Rupee’s continued rise intimidates IT pivotals

May 7, 2007

IT stocks have turned volatile in the past few days. After a solid surge to 5,150.28 on 16 April from 4,808.08 on 11 April 2007, owing to Infosys’ strong guidance for FY 2008, the BSE IT Index eased and moved between 4,954 and 5,124 up to 4 May 2007.

The rupee rose to a fresh nine-year high against the dollar on Monday, as the market tested how far the central bank would let it appreciate before intervening. By 9:14 IST, the partially convertible rupee was at 40.5450 per dollar, its highest level since May 1998, and gaining from Friday’s close of 40.8450/8600.

The rupee’s surge is a cause of concern for IT firms, as it directly impacts their revenue and profits, a lion’s share of which is accounted for by exports. At the time of announcing Q4 March 2007 results, Infosys had pointed out that its operating margins will be impacted by about 150 – 160 basis points (bps) due to the rupee’s inflation and by 300 bps on account of wage inflation. The company plans to compensate the impact through improved utilisations, lower losses in subsidiaries and scaled benefit from selling & general as well as administration expenses.

IT companies use the tool of hedging to mitigate risks associated with currency movements. TCS is said to have obtained a $1 billion hedge at a price range of Rs 43.50 – Rs 44. Infosys has a forex cover of $ 470 million. Satyam Computer has hedged a position of $ 460 million with a policy to hedge at least 50% position. Wipro has forward hedge contracts (options & futures) of $195 million at an exchange rate between Rs 44 – Rs 45.77.

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