Technology companies are facing headwinds from multiple factors. The condition of banking & financial services clients from the USA is only getting worse. The malaise is spreading to the European region, which was initially touted as an important region to offset the likely slowdown in the business from the US geography, with the data from both UK and Germany showing distinct signs of an impending slowdown. This puts a question mark on the possible revival of demand in the latter part of 2008.
The volatile currency is only adding to the concerns related to global demand environment. Though the rupee depreciation against the US dollar is fundamentally positive for the export-oriented technology sector, the benefits would not follow immediately as most of the companies have significant foreign exchange (forex) forward cover. Moreover, the rupee has appreciated by 4.5-5% against the Euro and the Pound Sterling each (the two currencies accounts for close to 30% of the billing for frontline companies) in the past two months.
That is not all. The appreciation of the US dollar against the Euro and the Pound Sterling would adversely impact the financial performance in US GAAP terms. This leads to speculation that some of the frontline tech companies might miss Q2FY2009 US dollar guidance and may have to revise downwards their FY2009 guidance in the US dollar terms. On the brighter side, the depreciation of the rupee against the US dollar will positively impact the margins in Indian GAAP performance.
Given the multiple headwinds, technology stocks are likely to under perform in the coming months. The anti-outsourcing rhetoric in the run up to the US presidential elections would also dampen the sentiments. Further, the street would keenly wait and watch the ability of Infosys Technologies and Satyam Computer Services to meet their Q2 guidance. The revision of guidance for FY2009 is also another important event that would provide direction to tech stocks. I would urge investors to Hold stocks of Wipro and HCL Technologies, however, Buy stocks of Infosys, Satyam and Tata Consultancy Services. But please note that you need to keep a 12-month horizon on these investments.
