Should you still invest in IT stocks?

Everytime the rupee goes up - the fortune of IT companies takes a beating. The last two quarters have been particularly tough - the rupee has gone up by almost 5%. So should one still invest in IT stocks at this juncture with the uncertain US economy and rupee appreciation?

Wipro earns over two thirds of its revenue from the US, so do Satyam, Infosys and TCS. Therefore, every time the rupee appreciates, the revenues of IT companies depreciate.

Analysts estimate that every 1% rise in the rupee reduces profits by 30-40 basis points. Most IT companies buy hedges to protect against currency fluctuation. But here's where the cookie crumbles.

Brokerage house CLSA says - Wipro will be the worst hit amongst IT companies since in the last quarter, it reduced its hedge by 50%. Infosys did so by 4%. But on the other hand, Satyam increased its hedge by 60% and TCS by 14%.

So companies like TCS and Satyam lose less if the rupee rises and if it depreciates - they only forego a premium. So if the rupee continues to appreciate, IT stocks will fast lose currency in the markets.

Dipan Mehta, Member of BSE believes that there is some element of uncertainty, which has come in on account of some specific problems in the industry. According to him, it would be safer to switch to high performing software product companies, which are available at good valuations and with growth prospects.

With IT czar Infosys' earnings barely 24 hours away, Prabhat Awasthi of Brics Securities does not expect a major fall in the stock. He mentions, "We believe business across tier I vendors has been extremely strong and there is really no major sign of slow down. So we think that there is unlikely to be a major fall in this stock post earnings release and guidance release because it's already reacted down from its peak quite significantly."

Even with such negatives playing in the sector, experts like Sangeeta Purushottam of Religare Securities and Dilip Bhat of Prabhudas Lilladher, believe that the IT sector has still the potential to outperform the Sensex and that it can be looked as a defensive bet.

Purushottam says, "The concern in the IT sector has really been the appreciation of the rupee. So as rupee finds some level of stability and we get some guidance from Infosys these will be the key factors to drive this sector. Also the concerns of people are going to be on how the next year will be as there are some emerging concerns on growth slowing down in the US. So these are the key factors, which are driving it, but some of them could settle down. So on balance, if we compare it to the Sensex earnings, this sector still has the potential to actually perform better than Sensex earnings."

According to Bhat, " In times when the markets are very unsure and probably slightly in a bearish phase, technology is always the best defensive sector. But our biggest worry is the strengthening rupee and despite 30-35% volume growth, we have still not seen any reasonable sign of price increase for them. Both the worries remain very strong, but still as what I said, it is at best a defensive sector to play in the current markets and maybe one should just wait for Infosys result particularly because that will set the tone."