Friday, July 24, 2009

IT company profits boosted by USD-INR rate?

Looking at the cheer in stock markets about good earnings reports from IT services companies, I thought of looking at the results and found that IT companies benefited to some extent by USD - INR exchange fluctuations. INR has depreciated by almost 16.2% between June 2008 and June 2009. The average exchange rate was 42 INR for USD in June 2008 quarter which has gone down to 48.82 INR for USD as per Infosys consolidated results. The consolidated net profit of Infosys, Wipro and TCS is up by 17.28%, 12.65% and 18.85% YOY, i.e. most of the gain has come from exchange rate differences. Looking at the USD-INR 2 year chart, we can say that this boost can last for one more quarter since exchange rate was average 43 INR for USD in July - September 2008 quarter and may remain between 48-49 in July - Sept 2009. But after October 2008 onwards exchange rate has remained around 48 so the results may not get any boost from exchange rate differences. Add to that the addition of new employees to the tune of 20K for all the firms before January 2010.

IT is a business which caters to other businesses and mostly in developed nations like the US, Europe and Japan. The sector has remained unaffected from this downturn so far due to the fact that businesses cut spending on IT after their own business slows down. Thus IT has a lagging impact from the real economy.

All three areas, the US, Europe and Japan, are under severe recession and capacity utilization of manufacturing plants are at historic low of 65%. Before manufacturing businesses expand, there is not going to be demand recovery for IT. Microsoft results already show this fact.
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