HCL Tech most vulnerable to € swings

The largest market for information technology (IT) services — North America — may be emitting positive signals but the domestic tech companies are yet to completely come out of the woods.  

This time, the software companies are facing headwinds from
cross currency movements, which have pulled down the European currency and propped up the Indian rupee against the US dollar.  

And analysts feel it will be difficult for the local technology majors such as Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies (HCLT) and others to contain the impact of the volatile currency movement on their margins and dollar revenues.
Some even believe top IT firms may be forced to revise the guidance in the face of adverse currency movement in the Europe.
A top executive at Infosys conceded as much.

“There are worries as a result of the Europe crisis.
Besides, the news from US is also not worry-free. The jobless index and the spending index are mostly negative there. We are cautious for these reasons,” the executive, who did not
wish to be named as the company is in the mandatory silence
period before the announcement of its quarterly financial performance, told DNA  Money.

Rostow Ravanan, chief financial officer of MindTree, said currency fluctuation is something that exporters have to learn to live with.
He, however, said since his company had a very small exposure to the Europe, it will not be significantly impacted.

IT market research firm Gartner has also trimmed worldwide IT spending growth to 3.9% from 5.3% it announced in the first quarter of fiscal 2011 primarily due to the devaluation of the euro versus the US dollar since the beginning of the year.

“The European sovereign debt crisis is having an impact on the outlook for IT spending,” said Richard Gordon, research vice-president at Gartner.

“The US dollar has strengthened against the euro during the second quarter of 2010, and this trend will likely continue in the second half of 2010, which will put downward pressure on
US-dollar-denominated IT spending growth,” he said.

Analyst Shashi Bhushan of Prabhudas Lilladher in his report on Thursday estimated euro and Great Britain Pound’s (GBP) depreciation against US dollar to hit local tech companies’ dollar revenue by around 1-1.5%.

He believes rupee appreciation against US dollar, euro and GBP by 0.7%, 8.7% and 5.1%, respectively sequentially will deal a margin blow of 95-110 basis points (bps) on quarter-on-quarter basis.

“We believe that a wage hike, along with currency headwind, will have 50-100 bps impact on the margin,” said Bhushan.
Some analysts, however, see Europe crisis as trigger for more cost reduction that, in turn, will mean more demand for offshoring.
As a result, firms like Infosys would be prompted to provide guidance, albeit lower than expected.

“I do not see any undue revision in guidance. The situation is only beneficial for Indian IT,” said a Mumbai-based analyst of a broking firm that tracks IT sector.

Prabhudas Lilladhar’s Bhushan echoed the view: “Current cost pressure has increased acceptability towards outsourcing (in Europe).”

“We believe that Indian IT services companies will be benefited from the current macro-economic environment of Europe,” said the Prabhudas Lilladher analyst.

According to him, HCLT would be most affected by the crisis in Europe.

“HCLT derives 26% of revenues from Europe. In addition to that, their top 10 clients have got the highest exposure to Europe.

HCLT’s top 10 clients derive 55% of their revenue from Europe, posing revenue risk for the company,” Bhushan said in his report.
Comparatively, the exposure of top 10 clients of Infosys, Wipro and TCS to Europe is just 28.3%, 22.1% and 29.2%, respectively.