Currency cloud over IT revenues

At a time when the US economy is showing growth, weakening European currencies — especially euro and the pound  — threatens to mar the game for software companies.

The depreciation in the euro and the pound by around 4-10% over the last few months could completely offset gains made from improved volumes in the US, said experts.

Therefore, even though tech companies are expected to register higher volumes, their earnings in US dollar terms may not move up proportionately in the current quarter.

Analysts said the negative fallout of cross-currency impact on dollar revenues is especially disturbing because information technology companies have forecast higher earnings for the current fiscal based mainly on volume jump and not so much through price rise.

An analyst with a broking firm, who did not want to be named, said among the top five IT vendors, HCL Technologies would be affected the most by the adverse cross currency movement as it has the highest exposure to Europe.

“HCL earns more than 30% of its revenues from Eurozone. The other four (TCS, Infosys, Wipro and Cognizant) generate less than a quarter of their revenues from the Europe and UK,” he said.

Analysts Kunal Sangoi, Ganesh Duvvuri and Pratik Gandhi of Edelweiss Securities said Infosys Technologies is likely to overshoot its quarterly volume guidance of 2.6-3.4%, but it could be pinned down due to the 1% impact of cross currency movement on the US revenues.

“Volume momentum has continued in this quarter and we believe Infosys is likely to beat its volume guidance of 2.6-3.4% quarter-on-quarter growth. But the cross currency movements (7.4% depreciation in the euro against the dollar) is likely to impact the company’s reported dollar revenues by 1%,” they said in a note on last Tuesday.

“Thus, despite current fiscal volume growth being higher than guidance, the 16-18% revenue growth guidance in dollar terms is unlikely to be raised. In our view, there is limited scope of an upgrade in FY11 consensus street estimates of 22% revenue growth in USD terms,” Sangoi, Duvvuri and Gandhi said.
Infosys earns 6.2% of its revenues in euros, 8.7% in pounds and 79.2% in dollars.

A senior executive of Infosys, who did not wish to be named because the company is in the silent period before the first-quarter results, said a weaker rupee may prove to be natural hedge against the weaker euro and pound as most of the company’s expenses are in rupees.

“It (cross currency impact) is very complex. On the one hand, you are affected by depreciation of the euro and pound; on the other, you benefit from the depreciation of the rupee. It also depends on in which currency you are reporting your earnings in,” he said.    

Also, analysts said since domestic IT firms bear most of their costs in Indian currency, cross currency swings may not impact the margins to the extent as revenues.

“On the margin front, it (cross currency movement) may have little or no impact because when any currency slips, the cost (in dollar) also comes down. This works as natural hedge, which usually helps exporters protect their margins,” said an analyst with a local broking firm.

Another factor that may come as a savior for the tech companies is pricing, which, of late, has stabilised and is expected to climb up in the second half of this year.

“We are expecting pricing to improve in the second half (of the current fiscal) when it is renegotiated. That may offset the cross currency impact on revenues to some extent,” said an analyst.