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The Indian Rupee
The Smart Profits Report: Issue #465
Wednesday, October 17, 2007
The Indian Rupee: The One Trend That Could Derail The Tech Titans
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
Talk about a jetset lifestyle… We just arrived in Bangalore - and believe me, the best tonic for all the traveling is a fantastic hotel at the end of the line. And the Oberoi fits the bill. I’ve stayed here before, and the place seems to have a staff-to-guest ratio of 2-to-1.
And while the luxury is great, that’s not the main reason we’re here. We’re here to see exactly what this hot emerging market has to offer and how much it’s progressing. And we saw some evidence yesterday with a visit to one of India’s biggest companies…
Upon arriving at the Satyam Infoway (NYSE: SAY) campus, there was only one reaction: Absolutely spectacular. The place is a sprawling oasis for its 18,000 workers. Like a modern company town, many Satyam employees live on-site, enjoying a fantastic lifestyle that clearly helps them with productivity. For some time now, the IT giant has racked up revenues and earnings growth in excess of 30% per year. And there doesn’t seem to be much blocking its path to further growth… except one trend. The Indian Rupee…
The Rupee Is Crashing The Party… But Firms Have Three Ways To Bolt The Door
You would think that a strong Rupee would bode well for India, since it could drive more investment to the country.
Granted, while hefty capital inflows to India are certainly helping the country’s growth, some of that is offset when the Rupee is strong against the U.S. dollar - as it is now (along with just about every other currency, it seems).
That’s not a good trend for companies like Satyam or fellow technology powerhouse Infosys (Nasdaq: INFY), India’s second-largest software firm (whose campus we’ll be visiting this afternoon).
While Infosys did report an 18.4% jump in net profits to $280 million in the last quarter, the fact that it does most of its business (over 60%) with American companies, or companies in dollar-based/pegged economies - means that over the long-term, it doesn’t want to see this trend continue.
That’s because with each day the dollar weakens, Indian firms like Satyam and Infosys have to offset the loss. And there are a number of ways it can do so:
- Be more productive
- Use dollar hedges
- Raise prices
Right now, Satyam is doing all three, while Infosys says it is “proactively hedging our currency exposures to mitigate this impact.”
Right now, the impact of a U.S. dollar/Rupee ratio of 38 or higher should not have a huge impact. But should the Rupee rise another 10% or so (to the mid 30s), there will be pain all around. That will be the opportunity to buy both these companies, which have excellent futures.
So what does the Indian government and central bank make of this?
Policy Makers Concerned Over Rupee Appreciation
Simply put, they’re quite concerned about Rupee appreciation. But they have a history of active currency management, which leads me to believe that the current Indian pickle may be a short-term trend - 12 to 18 months at most before the Rupee will be back over 40-to-1.
We met with representatives of the State and Federal government, and, essentially, policy makers have little choice. They need to export goods and services in order to stay competitive with countries like Malaysia, South Africa and even Egypt and Slovenia - all up-and-coming countries in the IT sector which is crucial to India’s growth.
So far, everyone is rolling out the red carpet for our group - a neat way to tour an emerging market. Next up… an education on Indian real estate - information that promises to be pretty revealing. Indian real estate is currently experiencing a very dynamic phase, but it’s also very speculative. However, there are undiscovered pockets of the country that still hold bargains.
I will touch upon further opportunities for you in a future issue.
Karim Rahemtulla
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Today’s Smart Profits Action Center
- Infosys enjoyed a solid second quarter, adding 48 new clients to its roster. This was the driving force behind its 18% income jump to $280 million. This led the company to hike its fiscal year earnings-per-share growth forecast from 13% to 15%. However, the firm also said that pricing rose by 1.9% during the quarter, due to the U.S. dollar buying an average of 40.19 Rupees, compared with 46.29 Rupees a year earlier. This dented earnings, considering that almost two-thirds of the company’s clients came from the U.S.
- Investors today can’t afford to sit idly on the sidelines and watch the global expansion in India, China, and the world’s other fast-growing economies. Already, emerging markets are forecast to generate an additional $82 trillion in wealth by the end of this decade alone. This could be the greatest wealth boom in our lifetimes - and these markets give you an excellent way to diversify your portfolio.
- Well, here’s your perfect “wake-up call”… no other daily news service offers the advice, research reports and, ultimately, the investment recommendations that Money Morning will bring to you via e-mail first thing each weekday morning. And it’s completely free of charge. To start getting it right away, log on to www.moneymorning.com and enter your e-mail address in the signup box. Once you do, you’ll receive our special report, direct to your e-mail: The Three Best Investments in Asia. So sign up today. There’s never been a better way to profit from the global boom. And it doesn’t cost you a penny.
Related Articles:
- The Economy of India: GDP Growth Is Exploding And Stocks Are Surging… Is It Time To Bet On India?
- Emerging Markets: Two Plays In India… With Caution
- The Global Economy: U.S. Sub-Prime Mortgage Meltdown Effecting World Markets
