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Companies that are tactically gaining the most from the weak INR are
interestingly those that lose the most from the INR strengthening. Which are
these? Typically, they are stocks that satisfying these two criteria:
Modest operating margins – A small positive delta can produce more
significant % changes in EBIT for a lower-margin company than a more
profitable peer (having comparable exposure to USD billing as % of total
billing). Rule of thumb, a company with 15% EBIT margins should gain
twice as much as a company with 30% margins purely from the INR
weakness because of similar absolute EBIT increment from INR
depreciation over a lower EBIT base (15%). For example, a 1%
depreciation of the USD against the INR affects TCS’ margins by 40 bps
and HCLT’s margins by 30 bps, because of the latter’s much lower
operating margins (HCLT’s margins at 14% is almost half of TCS’),
HCLT’s EBIT gains over 1.7x in % terms (as TCS’ EBIT).
Skewness of cost structure towards offshore or INR-denominated cost
structure – Larger companies such as TCS/Infosys/CTSH/Wipro have
more costs onsite than offshore. USD denominated costs are a natural
hedge against the USD-INR fluctuation leaving the INR-based costs (or
costs in India), naturally unhedged. Companies that have a much larger
proportion of offshore or INR denominated costs in their cost structure
because of their business model are more vulnerable to the INR
appreciation because of lack of natural hedge in their cost structure.
Conversely, these companies gain more when the INR depreciates (as it is
depreciating now) – all other things remaining the same.
Tactically, those in Indian IT Services who are gaining because of this are
certain mid-caps such as MindTree (NR), KPIT Cummins (NR), eClerx
(NR) and Persistent Systems (OW) who have very offshore-centric
business models with offshore revenues. Offshore revenues for these
companies well exceed 50% of their revenues and offshore effort exceeds
80% of the total effort. Of course, almost all India-based BPOs fall in this
category given that the BPO is a very offshore-centric business model.
BPOs such as EXL, WNS and Genpact have had significant stock
appreciation in the past two-three months handsomely beating the Indian
IT index (returns measured in USD) since June 2011 (2QCY11).
The conclusion is that if one wishes to tactically play the weak INR
trade in Indian IT and assess which companies gain more from the
weak INR (assuming they have a decent business outlook), seek out
those companies that satisfy the above two criteria – all other things
being equal. Investors should note that this is a tactical trade that will
reverse as soon as the INR reverses its course of depreciation against the
USD. Also, we must examine companies’ hedging position so to see to
what extent gains from the weak INR flow through to PAT from EBIT.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Companies that are tactically gaining the most from the weak INR are
interestingly those that lose the most from the INR strengthening. Which are
these? Typically, they are stocks that satisfying these two criteria:
Modest operating margins – A small positive delta can produce more
significant % changes in EBIT for a lower-margin company than a more
profitable peer (having comparable exposure to USD billing as % of total
billing). Rule of thumb, a company with 15% EBIT margins should gain
twice as much as a company with 30% margins purely from the INR
weakness because of similar absolute EBIT increment from INR
depreciation over a lower EBIT base (15%). For example, a 1%
depreciation of the USD against the INR affects TCS’ margins by 40 bps
and HCLT’s margins by 30 bps, because of the latter’s much lower
operating margins (HCLT’s margins at 14% is almost half of TCS’),
HCLT’s EBIT gains over 1.7x in % terms (as TCS’ EBIT).
Skewness of cost structure towards offshore or INR-denominated cost
structure – Larger companies such as TCS/Infosys/CTSH/Wipro have
more costs onsite than offshore. USD denominated costs are a natural
hedge against the USD-INR fluctuation leaving the INR-based costs (or
costs in India), naturally unhedged. Companies that have a much larger
proportion of offshore or INR denominated costs in their cost structure
because of their business model are more vulnerable to the INR
appreciation because of lack of natural hedge in their cost structure.
Conversely, these companies gain more when the INR depreciates (as it is
depreciating now) – all other things remaining the same.
Tactically, those in Indian IT Services who are gaining because of this are
certain mid-caps such as MindTree (NR), KPIT Cummins (NR), eClerx
(NR) and Persistent Systems (OW) who have very offshore-centric
business models with offshore revenues. Offshore revenues for these
companies well exceed 50% of their revenues and offshore effort exceeds
80% of the total effort. Of course, almost all India-based BPOs fall in this
category given that the BPO is a very offshore-centric business model.
BPOs such as EXL, WNS and Genpact have had significant stock
appreciation in the past two-three months handsomely beating the Indian
IT index (returns measured in USD) since June 2011 (2QCY11).
The conclusion is that if one wishes to tactically play the weak INR
trade in Indian IT and assess which companies gain more from the
weak INR (assuming they have a decent business outlook), seek out
those companies that satisfy the above two criteria – all other things
being equal. Investors should note that this is a tactical trade that will
reverse as soon as the INR reverses its course of depreciation against the
USD. Also, we must examine companies’ hedging position so to see to
what extent gains from the weak INR flow through to PAT from EBIT.
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