STRONG ~ TO HURT MARGINS OF IT FIRMS

These condo fa 4- part series look sat how a strong~ is hurting some of India’ s top exporting sectors

Indian information technology (IT) services companies foresee a fresh impact of the strong rupee against the US dollar.

This comes at a time when the business environment for these firms is tougher than ever — weak demand, rising visa and marketing costs, and so on. There is also pressure from rising automation, which is helping costs but taking away jobs. While both large- and mid-sized IT services companies have their hedging policies in place, a stronger rupee over a longer period of time may hurt their margins, AYAN PRAMANIK & ROMITA MAJUMDAR report. Business

Standard, in a four-part series, looks at how the stronger rupee is hurting some of top exporting sectors.

Indian information technology (IT) services companies foresee a fresh impact of a strong rupee against dollar. Worse, this comes at a time when the business environment is tougher than ever — weak demand, rising visa and marketing costs, and so on. There is also pressure due to rising automation, which though is helping costs but taking away jobs.

While both large and midsized IT services companies have their hedging policies in place, a stronger rupee over a longer period of time may hurt their margins.

Rupee closed at 64.2 a dollar on Wednesday (currency markets closed on Thursday) and has been hovering around 64 levels during the past week. During the calendar year 2017, the Indian currency has appreciated nearly six per cent against dollar on the back of high inflows into the Indian stock market.

While Wipro, India’s third-largest software exporter, said hedging has helped it offset the impact of sudden movement in the currency and appreciating rupee for long term may hurt the sector, mid-tier companies such as Persistent Systems and Hexaware Technologies claim their hedging programme could offset such currency fluctuations.

“While consistent hedging policy can provide near-term protection, rupee appreciation over a longer term can affect India’s export competitiveness and further imbalance India’s current account deficit. An appreciating rupee may place the Indian IT industry at a disadvantage vis-à-vis global competition,” said Aravind Viswanathan, vice-president and corporate treasurer, Wipro.

As on June 30, Wipro had hedged over $2.3 billion, which is a little more than three months of its revenue based on the company’s consolidated FY17 financials. The firm says it has a hedging policy that has helped it deliver consistent performance on forex realisation rates and allows the business to adjust to sudden movements in currencies.

Both Infosys and TCS (Tata Consultancy Services) declined to comment on any probable impact due to the currency fluctuations.

For a perspective, TCS' June quarter results indicated that Ebit margins at 23.4 per cent were 170 basis points (bps) lower than the year-ago period and 233 bps sequentially. Ebit is earnings before interest and tax. TCS highlighted that 80-bp impact was due to currency. For Infosys, too, currency movements impacted margins to the tune of 60 bps, estimate analysts. During June quarter, the average rupee value was up 3.7-3.8 per cent over year-ago and March 2017 quarters.

Smaller firms have seen less impact so far. “Hexaware has a robust hedging programme to counter such rupee appreciation, resulting in increase in profit after tax due to forex gain of $2.1 million and will continue to do so in the near future at Q2 forex rates (average rate),” said R Srikrishna, chief executive officer of Hexaware.

Pune-based Persistent Systems said measures such as deferment of some cost structures or salary hikes, apart from hedging, could help them contain the impact of a strong rupee. “Our top line has grown 3.6 per cent and profit has grown 3.2 per cent. Forex fluctuation has been quite significant but profit has done well. A lot of our work is done on-site but the expectations are consolidated. For forex, we hedge using a standard policy over a 12-month period. A lot of our spending is in dollars, which creates a natural hedge,” Mritunjay Singh, executive director, Persistent Systems, had said last month.

However, even as analysts believe that large firms such as TCS, Infosys and Wipro may partly offset the currency impact with better operational measures, utilisation, etc, at least two analysts said it would be tough for the midsized companies to avoid the impact of rupee despite hedging.

Madhu Babu, IT analyst at brokerage firm Prabhudas Lilladher, believes hedging can help companies for a couple of quarters.

“Hedging probably will give a cushion in short term since a lot of the project receivables were hedged last year when the dollar against rupee was as strong as ~68. A strong rupee in long term can result in lower forex gains over the next few quarters, impacting their margins,” said Babu.

He added that most of the Indian IT firms have already taken cost-cutting measures, apart from hedging, such as salary correction for very senior employees, less recruitment, etc. “As we foresee further appreciation of rupee would hurt their margin. I am more worried about the mid-cap firms in the range of 15-20 per cent operating margin. The sector is already seeing a double whammy of slow business growth and higher on-site costs,” says Babu.

Apurva Prasad of HDFC Securities said strong rupee might result in 1.5 to 2 per cent movement on earnings per share (EPS) of IT services firms. “While hedging can help the sector in the short term, IT firms tend to lose out on forex gains if rupee appreciation continues.” Cross-currency benefits through pound or euro, albeit having a small exposure, may mitigate the impact of strong rupee against dollar.