IT – What’s driving the rally - INR depreciation or recovery expectations in Trump regime?

Recent USD appreciation - The Indian IT services industry usually cheers when the rupee weakens against the US dollar, as it enhances export revenues. However, current dynamics suggest that the recent rupee depreciation against the dollar may not provide significant gains for Indian IT firms even though the rupee has dropped 1.1% against the US dollar in the last three months.

Change in revenue mix and cross currency trends- This is because IT companies are no longer as dependent on the dollar as they used to be as historically. Sure, over 60% of their revenue still comes from the US, but that share has dropped a bit. For instance, TCS now gets 49.3% of its revenue in dollars, down from 51.4% in March, while Infosys’s dollar revenue has dropped from 58.9% to 57.4%, as they have diversified geographically and are expanding in Europe and Australia, implying higher (than earlier) earnings in euros and pounds. We note that TCS is growing its GBP and euro revenue, and Infosys is ramping up its euro business. So, the impact of the US dollar strengthening isn’t as big as historical levels. Furthermore, the rupee has actually strengthened by 4.2% against the euro and 0.9% against the pound, which offsets the gains from the USD appreciation.  

So, why are the stocks rallying ?? -  With US elections over and likely tax rate cuts potential under new regime, there will be positive outlook in near to medium term as it also coincides with IT companies clients’ cost planning period alongwith rate cut cycle. Thus, while FY25 is likely to witness a mid-single digit revenues growth, FY26 could see double digit revenue growth for the sector. This will be largely led by increased discretionary spends in key sectors such as BFSI, Retail and Telecom. In anticipation of such recovery, IT index has gained 8% in last one month.

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