Infosys, Wipro, Sify ADRs: Why Indian American Depositary Receipts Fell After Fed Rate Cut?

Indian companies' ADRs that are listed on the NYSE and Nasdaq plummeted by nearly 2% to 9% on September 18, after the US Federal Reserve took an aggressive approach to lowering rates. Fed has cut key federal fund rates by a massive 50 bps, surprising market participants and economists.

One of the main reasons why Indian ADRs are in red is that their prices have already factored in the rate cut expectation, and hence investors opted for cashing gains. The slip in ADRs follows a free fall in Indian tech stocks on BSE and NSE earlier on Wednesday.

Infosys ADR is currently trading at $22.53, down by 1.9%. While Wipro's ADR dipped by 1.7% to trade at $6.390. However, Sify Technologies, an Indian information and communications technology company, witnessed the most decline in its ADR by nearly 9% to trade at $0.407.

On the other hand, ADRs of ICICI Bank, HDFC Bank, Zoomcar Holdings and MakeMyTrip surged by 1% to 3%. Banking, travel tourism and retail sectors are seen among the top winners due to rate cuts.

After market hours on September 18, 2024, the Nifty IT index dipped by 1,325.70 points or 3.05 to close at 42,089.30. Stocks like LTIMindtree, Coforge, Wipro, Tech Mahindra, HCL Tech, Infosys, LTTS, Persistent Systems, TCS, and Mphasis dipped by 1% to 6% on the closing bell.

In a surprise move, although with a low probability of expectation, the Fed decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. This would be an aggressive 50 bps hike instead of the estimate of 25 bps, also the first cut since 2020.

Fed's decision follows after gaining greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance.

However, the Fed said, the economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate. Adding, it said, inflation has made further progress toward the Committee's 2 per cent objective but remains somewhat elevated.

Explaining in detail the impact of the Fed rate cut on Indian IT companies, brokerage JM Financial earlier said, there could be a three-pronged reduction in federal rates. These are - a) lower cost of equity driving up stock multiples; b) discretionary demand revival as the economy recovers; and c) lower interest burden on corporates opening up room for higher opex (hence IT Services).

According to JM's analysis, average interest cost across sectors has risen by merely 30bps over this period (vs. c.5 ppt increase in FEDRATE). Besides, most sectors have de-leveraged. Opex reduction, JM believes, is explained more by the unwinding of excess IT spending after post-COVID-spike than by an increase in interest burden. IT spending revival should also be led by the normalisation of spend, rather than lower rates alone, in its view.

Also, JM's note said, "We are likely coming out of the spend normalisation phase. The probability of a recession is relatively lower too. While the recent unemployment print does raise fear, the impact on already optimised IT Services spending might be limited. Incrementally, things should therefore improve, albeit gradually, in our view. The last, more technical, impact of a rate cut is the lower cost of equity (equals higher PER)."

Adding, JM's note said, "We plotted NIFTY IT earnings yield with US 10Y Bond yield since 2007. For the first time, US 10Y Bond yields have risen (and sustained) above NIFTY-IT's earnings yield. This reflects anticipation of bond yield going down as rate-cut resumes. In other words, multiple expansions due to rate-cut might already be in the price."

Therefore, JM believes the fed rate cut cycle will not translate into any meaningful improvement in corporates' ability to spend more on OPEX (and hence IT Services). Instead, that should track better growth prospects and - as we discuss in the next section - end of IT spend normalisation.