We are changing our FY15E rupee assumption to 59 vs. 60 earlier, as if the rupee stays at the current level of 58.8 for the remainder of year, the FY15E average could stand at 59. This drives a 1.5-4.5% cut in our FY16E EPS estimate for tier-Is and 1.4-4.7% for tier-IIs within our coverage universe. Though a sharp rupee appreciation could cause near term challenges, a gradual appreciation should be manageable as reinvestments could be curtailed somewhat. That said, we would use weakness to accumulate tier-I and quality midcaps as 1) tier-Is are likely to report average dollar revenue CAGR of 12.9% during FY14-16E (average 24.3% EBIT margins in FY15-16E), vs. 14.5% reported during FY09-14 (average 23.8% margins), 2) while valuations at 14.8x one-year forward are at a ~7% discount to its FY09-14 average multiple of 15.9x. Though tier-IIs are trading in-line with their historical average (10x vs. 9.6x), growth has accelerated for select midcaps like MindTree. We believe large caps are better placed to weather the currency volatility. Hence, we recommend accumulating select stocks on sharp sell-offs.
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The report is hoping that the Rupee will stay at the current levels, around 59 to the dollar for the remainder of this fiscal, but at present the RBI is intervening to keep it there by buying dollars. What happens if Rupee hits 55 this fiscal ? What if it goes up to 50 ? I think the last line of the report is right where it says buying these stocks on sharp sell offs/corrections. But that implies a short term opportunity to cash in, unless one is looking to sell these stocks at retirement age.