We expect all IT companies under our coverage to report expansion in margins primarily due to significant rupee depreciation and strong operational performance. Generally 1 percent depreciation in rupee results in a margins expansion in tune of 30-40 bps. Thus, we expect margins expansion in tune of 200-300 bps for all IT companies offset by salary hikes, higher visa cost and reinvestment in the business.
Rupee depreciation will result into Forex losses for all IT companies in the quarter which will hit the NPM margin, however the quantum of loss will depend on the nature and timing of hedges.
Valuation & Outlook
Indian IT Sector has outperformed over the last 3-6 months - despite the overhang caused by introduction of the immigration bill by the US Senate, salary hikes announced by all IT companies to curb inflation and bring down attrition and rising visa cost and rise in onsite hiring's which is dragging margins.
Sector outperformance was primarily supported by significant depreciation in rupee, improved economic data in key markets like US and Europe, strong deal wins, robust environment for new deal wins, ramp up of existing projects and improved commentary on discretionary spending from all major IT players. We believe still there is a lot of juice left in the sector as the recovery has just started in the west.
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