US - Iran tensions strengthen dollar giving boost to Indian tech stocks

• Indian IT stocks are on the rise as tensions between the US and Iran tank the rupee's value.
  
• Infosys, Tech Mahindra, HCL Technology and TCS are trading in the green since markets opened on Friday morning.
  
• Rupee depreciation could help Indian IT companies expand margins by lowering the transition costs of large offshore deals.
  

The already weakening rupee stumbled further after reports of a US airstrike against Iran's military leaders rolled in early Friday. As the markets opened, INR tanked 24 paise to 71.62 against the US dollar as oil prices soared by 4%.

This sent the Bombay Stock Exchange (BSE) and Sensex into the red. But, there is one set of stocks that has something to gain — IT companies.

At the time of writing this article, Infosys was trading at ₹744.10, 1.28% higher than its opening price. Tech Mahindra, HCL Technologies, and Tata Consultancy Services are also in the green trading at least 1.5% higher today.





A much-needed boost after underperforming in the last quarter of 2019

The last quarter of 2019 has been fairly tepid for the IT sector. "NIFTY IT underperformed Nifty by 530bps in 3QFY20 and by 320bps in CY2019," said a report by Nirmal Bang.

Although the quarter is pegged to be seasonally weak for IT companies, Infosys saw a massive 9.2% decline in its stock price — due to the whistleblower allegations against it.

Other tech companies were also weighed down by the global economic slowdown. As clients started bargaining, the margins for large deals shrunk and transaction costs increased.

"We expect Tier-I techs to report QoQ growth of 1.2-3.1% and Tier-II techs to report 1.9-3.5% growth in CC terms in the seasonally weak Dec'19 quarter," said DBS' India Equity Research Report.

Rupee tailwinds

However, depreciating rupee can turn things around for IT companies, especially when it comes to margins. In verticals like financial services and manufacturing, a lot of IT companies' business is offshore. "Together, European BFSI and Automotive verticals form about 15-20% of IT sector revenues," remarked DBS' report.

Although rupee tailwinds will only benefit the companies if they aren't offset other mitigating factors like salary hikes. Tech Mahindra could growth by as much as 3.1% QoQ due to 60 bps of cross-currency tailwinds. A large part of it is due to the partial consolidation of the Born acquisition, but rupee depreciation will reduce transition costs related to large deals.

HCL Tech is pegged to growth at 1.9% and TCS at 1.2% aided by rupee fall according to DBS.

Tier-II companies like Persistent and LTI have much more to gain. "Tier-II players should see a higher impact on margins relative to Tier-I players on account of industrialization of digital, increased offshoring and higher attrition," said DBS' report.

US-Iran tensions might have depreciated the value of the rupee for now but there are many other factors that could impact currency in the coming days. This includes the effects of no-deal Brexit, Germany's economic slowdown, and the deceleration of global growth.

See also:
Pentagon says it killed top Iranian general Qasem Soleimani on Trump's order

Double whammy for Indian share market ⁠— oil spikes and exchanges increase margin money needed for intra-day trade

Oil prices soar by 4% as tensions rise between US and crude-rich Iran