IT shares were witness to broad-based selling in early trades as a strengthening rupee indicates lower revenues for these companies.

Among the losers were IT bellwether Infosys Technologies (down 3% to Rs 2,704), Satyam Computer (down 2.6% to Rs 161.50), Wipro (down 1.9% to Rs 841), HCL Technologies (down 3% to Rs 124.40), Hughes Software (down 4% to Rs 212) and Polaris Software (down 2.7% to Rs 118).

The losers among second line IT shares included PSI Data Systems (down 5% to Rs 61), VisualSoft Technologies (down 3.4% to Rs 124), Subex Systems (down 2% to Rs 112), KPIT Cummins Infosystems (down 1.6% to Rs 143), Mastek (down 1.5% to Rs 286), NIIT (down 1.4% to Rs 121.50), Geometric Software (down 1.2% to Rs 377) and Aftke Infosys (down 1% to Rs 209).

The early fall in IT stocks follows their decline on Wednesday. IT stocks have been southward bound on the bourses. Their fall has come amid volatile trading including intra-day volatility. In the last one month, the combined market cap of 23 large software companies fell 3.2% to Rs 59,319.13 crore from Rs 61,319.33 crore. In the last one quarter, market cap fell a staggering 32% from Rs 87391.39 crore.

The latest fall in IT stocks has been triggered by concerns over the strengthening rupee vis a vis the US dollar. The rupee was trading at 46.8350/8450 per dollar in morning deals compared to its last close of 46.90/91. The rupee has gained as much as 2.6% against the dollar in 2003. This is much cause for concern for IT companies as they derive a major portion of their revenues from exports.

The rupee's appreciation means that IT companies would no longer get the 'other income' (from a depreciating rupee). On the flip side, most IT companies take forward cover and are to that extent insulated against the appreciation of the rupee, analysts say.

Already, pressure on billing rates has been haunting IT sector stocks. Software companies have been under pressure to lower billing rates as their clients have to reduce costs following a global economic slowdown. Competition is also hotting up for Indian IT companies with some foreign companies setting up shop in India, even in-house operations.

While billing rates are falling, costs are up, thereby squeezing profit margin. A healthy volume growth requires employee additions, and increments and promotions to the existing staff. Increase in sales and marketing expenses and stretching of sales cycle are putting additional pressure on margins.

On the flip side, local IT companies have displayed strength in cost-competitiveness and proven delivery capabilities. Nevertheless, analysts expect a further pressure on billing rates of IT companies in the coming months.

It is the pressure on billing rates that prompted Infosys Technologies to give a muted guidance for FY 2003-04 in early April 2003.