For margin-squeezed IT exporters, the rupee’s fall comes as a relief

At a time when the dark clouds of competition are dampening profit margins of IT companies, the fall of the rupee comes as a silver-lining.

Earlier in the day, the rupee touched a historic low of 70 to the US dollar, making it one of the worst performing currencies. It has fallen 8.8 per cent since January. While this has a negative effect on your purchasing power, for the $1,155-billion IT export sector, it is a positive.

Some analysts pointed to BusinessLine that with most IT contracts in dollar terms, an appreciating greenback helps in increase their revenues and positively impact profitability.

“Around 70 per cent of export revenues, on an average, are billed in the US dollar and this would help the firms improve margins,” said an analyst from a leading brokerage.

For example, Infosys bills around 80 per cent of its revenues in the US dollar and the remaining from Australian dollar, the British pound and the euro.

Most analysts are figuring out the extent of the currency impact on IT services companies as the dollar index, potential Fed rate hikes and escalating trade issues could impact currencies in emerging markets, India being no exception.

“The possibility of the rupee going anywhere between 73 and 75 levels is strong,” said Rusmik Oza Senior Vice-President (Head of Fundamental Research), Kotak Securities.

According to Gaurang Somaiya, Currency Analyst, Motilal Oswal Securities, they expect the weakness of the currency to extend further. Some believe that the falling rupee could benefit software exporters by 100-120 basis points (1-2 per cent).

Software exporters over the years have changed their hedging strategies in the backdrop of continued volatility across all currencies. For example, TCS now hedges revenues, net of expenses, by 70-80 per cent across major currencies.

Earlier, it used to commit a certain number as a part of its hedging efforts. Additionally, TCS hedges on a rolling 2-3 quarter forward basis using a variety of financial instruments.

In the last quarter, when the rupee was around 68 levels, it helped TCS improve its margin by 0.7 per cent. Infosys, also follows a similar strategy.

However, on the ground, despite this tailwind, companies are under huge pressure. Clients in the US have been hesitant in raising the price of outsourcing contracts in the last few years. Add to that the intense competition, said Sanchit Vir Gogia, Founder, Greyhound Research.

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