The Relation between Depreciating Rupee and Indian IT stocks
Ever noticed, when Indian Rupee depreciates against US Dollar, all sector stocks are affected negatively. Some, even go red on the stock exchange. But one sector happily enters into the positive area.
Guess which one?
The IT Sector.
The top five companies of IT sector (by index weightage) are Infosys, TCS, Tech Mahindra, HCL Tech and Wipro. All these companies are the multinational companies of India.
The main and biggest clients of these top IT companies are from the USA.
For eg. India’s third largest software firm Wipro Ltd has named customers such as US electronics retailer Best Buy Co. Inc. and insurer Main Street America Group; it’s bigger rival Infosys Technologies Ltd announced a three year $150 million (Rs666 crore) contract from Microsoft Corp. to manage internal IT systems; and HCL Technologies Ltd has named seven clients, including US publishing group Advanstar Inc. and French glass maker Saint Gobain. (source: Livemint)
When these companies are made payments by the US firms, they are paid in US Currency(US dollar). Then, the Indian Companies convert their payments into their local currency (Indian Rupee). During the currency conversion, higher the value of Dollar, more will be paid to companies in Indian Rupees.
Higher currency conversion means more profit which lets the company to expand it business.
If 1 USD/INR = Rs 70, and then if Rupee depreciates by 50 paise, then new conversion rate is 1 USD/INR = Rs 70.50. Suppose the company has made a profit of 1 Million USD, then after depreciation of Rupee, the company makes an additional profit of Rs 500000.
So this was a quick brief on how Indian IT firms benefit from depreciating Rupee. Depreciating Rupee also helps the IT firms in their hedging policy.
Thank you for reading