The one thing that could fell the tech giants
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...
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:
(Article continues below)Advertisement
- 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?
Will policymakers be proactive?
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, policy makers essentially have little choice. India needs 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.
By Karim Rahemtulla, Investment Director, Mt. Vernon Research for the Smart Profits e-Report, www.smartprofitsreport.com
