Markets

IT stocks fall on concerns of a weak euro affecting realisations

K Venkatasubramanian BL Research Bureau | Updated on January 24, 2018

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IT companies’ stocks fell in trade on Monday, as fears of lower revenue growth in a seasonally weak December quarter became more pronounced.

Continuing their underperformance over the past few months, the shares of Tata Consultancy Services (TCS), Infosys and HCL Technologies fell by 1.5-2 per cent on Monday, while that of Wipro ended flat. Tech Mahindra, too, fell by a similar margin.

Steeper correction due to rich valuations affected the shares of mid-tier players such as Persistent Systems, which fell 6 per cent, while MindTree slipped nearly 2.5 per cent. So, a combination of weak sentiments and profit-booking seems to be at play.

Cross-currency headwinds

Although the rupee has been fallen against the dollar to ₹63-64, which is expected to help margins, most IT companies still face challenges due to cross-currency volatility.

The euro also has been quite weak against the dollar, and hence realisations for software companies are likely to be affected for the December quarter. In general, the third quarter tends to be a soft period for most IT companies.

With more stimulus indicated by the authorities in the European Central Bank to set the Euro Zone on the growth path, the currency is expected to further weaken against the dollar.

Firm-specific concerns

Indian IT companies derive 20-30 per cent of their revenues from Europe, with the UK being the largest market.

Apart from currency challenges, there were also company-specific concerns with TCS indicating a weak December period while HCL Technologies had indicated a 200-bps impact on its revenue during the quarter.

There are also reports that lower oil price is leading to some large global refiners possibly reducing capex, affecting their IT outsourcing spends as well.

The markets appear to be factoring in a pretty weak scenario across the board for most IT companies. It is interesting to note, however, that revenues from the European geography have been growing at a healthy clip compared to the North American Region over the past three-four quarters for most IT companies.

Published on January 05, 2015

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