Re cloud over tech firms

Just when volume growths of information technology (IT) companies were expected to pick up with spending power returning to customers in the Western markets, a strong rupee against the US dollar is playing the party pooper.

A firm Indian currency is expected to pin down rupee revenue growth and crimp margins of tech companies.

Even the cross-currency gains that will come from a stronger euro, pound and Australian dollar (A$) against the US dollar will not offset the loss from unfavourable rupee-dollar exchange rates.

Diviya Narayanan, analyst with UBS, in a report anticipates rupee appreciation to impact revenues of software exporters by 3-4% and margins by 150-250 basis points (bps) in the December  quarter of this fiscal.

“On an average, the rupee appreciated 3.6% against the dollar, shaving off 3-4% from revenue growth in Q3 of this fiscal,” she writes.

Narayanan predicts cross currency appreciation — led by a 9% and 3.2% appreciation of the A$ and euro, respectively, versus the dollar — to boost dollar revenue by 0.2-0.8% in the same quarter. But, this won’t be enough to offset the revenue erosion due to a climbing rupee.

The rupee strengthened sharply last quarter to a high of Rs 46 per dollar and ended at Rs 46.5 per dollar on December 31. On Thursday, it rose to a high of Rs 45.55 per dollar, its strongest since September 23, 2008, before closing at 45.68, 0.4% above its previous close of 45.85.

Since a large part of domestic IT firms’ revenues are denominated in dollars, the rupee will play havoc with their earnings in the December quarter.
Also, as only some portion of their forex risk is hedged they will not come out of it completely unscathed.

Girish Paranjpe, joint chief executive officer (CEO) of Wipro Ltd, said his company hedged its risk in all currencies depending on the levels of exposure to them. Wipro earns 72% of revenues in dollar, 13% in pounds and 8% in euro.

TCS hedges only its dollar revenue. However, a TCS spokesperson said all receivables are hedged in local currencies, which includes US dollar, pound sterling, euro, Brazilian real, South African cronos, Canadian dollars and Australian dollars.

Rostow Ravanan, chief financial officer (CFO) of mid-tier MindTree Ltd, said his company follows a policy where 50% of the company’s total collection is hedged every month on a rolling basis for 12 months.

“There is no running away from the impact of forex fluctuations for an exporter. Whatever they (exporters) do, the swings in currencies will impact them,” he said.

Kawaljeet Saluja and Rohit Chordia, analysts with Kotak Securities, believe companies which had taken long-term hedges when the rupee was on a high may have recorded a small gain.

“Most companies have reduced their hedges from the peak levels of FY09. However, companies like Wipro, MindTree and HCL that had taken long-term hedges during the previous rupee appreciation phase could benefit on their hedges in the form of MTM (marked to market) gains or reductions in balance sheet OCI losses,” the duo say.

Nitin Padmanabhan, analyst with Centrum Research, said; “the dollar revenue loss as a result of appreciating rupee will not be offset by appreciation of pound and euro against the dollar. While the benefit as a result of other currency appreciation is about 0.7%, the loss due to rupee appreciation is about 3.7%. So in effect there would be about 3% dollar revenue loss this quarter.”

Padmanabhan feels Infosys is better placed as compared to others since they hedge for two forward quarters there by getting a much lower rupee-dollar value than those who have hedged long time back.

Kotak Securities’ Saluja and Chordia believe earnings of Tier-II companies like MIndTree, Sonata and others are more leveraged to the rupee-dollar rate than Tier-I firms like Infosys, TCS, Wipro and HCL.