Currency crimp: IT results will be roiled by rupee’s rise

MUMBAI: The appreciation of rupee against the US dollar is seen as a party pooper for information technology (IT) companies, who otherwise are expected to report robust growth figures for the quarter ended December 31, 2006.

“Margins will fall by 50-150 basis points due to the rupee appreciation,” says Hitesh Zaveri, analyst with brokerage Edelweiss Securities.

During the quarter, the rupee has appreciated by as much as 3% on an average, and 3.6% on an end-of-period (Oct 1 to Dec 31) basis.

Similarly, the euro and the pound depreciated 1.9% and 0.8%, respectively against the rupee during the quarter. Over 90% of an IT company’s earnings are in foreign exchange and a majority of their expenses are in rupees. A weak dollar means fewer rupees earned for each dollar billed.

As a thumb rule, a one percentage point fall in the dollar against the rupee shaves off about 25 basis points in operating margins.

Another thing going against the companies is that the October-December period traditionally has the least number (3% fewer) of working days.

Since most contracts are ‘time and material’ in nature rather than fixed price (meaning the client is billed on the basis of the number of people working on the project),  a larger number of holidays means fewer billable man-hours.

However, strong volume growth (up about 50% from the year ago period) and the return of pricing power (billing rates are up 1-2%) are expected to push revenues and profit growth in the range of  40-45% in a year-on-year basis for major the players.

Edelweiss’ Zaveri expects a positive earnings surprise from Infosys and TCS. Enam expects TCS, Satyam, Tech Mahindra, and Hexaware to post their best sequential results.

Since December is the financial year-end for most US companies, a signal on the annual IT budgets of clients for the coming year is eagerly awaited.

“With the US economy showing signs of slowing, I would like to know how their IT budgets will be in the coming year,” said an equity analyst.

However, most experts believe that this time a slowdown in the US economy will not put the Indian IT industry in a tailspin as it did post 9/11. “Outsourcing has become an accepted strategy now. Hence I see less pain for Indian IT companies if the US economy slows down,” says NGN Puranik, director, Enam Financial Consultants.

Indian IT companies’ dependency on the US has reduced over the years. Companies like Tech Mahindra derive a majority of their revenues from Europe. And going forward, the investments Indian firms are making in cracking open the European and Japanese markets will begin to pay dividends.