IT companies seen facing rough weather as volatility of currency hits them hard

Indian software exporters are seen facing headwinds in the form of foreign exchange losses due to a volatile dollar in the December quarter and may face a possible clampdown in discretionary spending in the year ahead as customers are seen revisiting their IT budgets.

As Infosys gets set to kick off the December quarterly results on Friday, industry watchers expect IT companies to post not-so-spectacular numbers.

According to a Deutsche Bank report, there has been a considerable impact as volatility in different currencies were the most severe in the December quarter in the past four years.

“The impact on dollar revenue growth rates could be 130-220 basis points or 1.3-2.2 per cent,” added the report. According to another IT analyst who did not wish to be named, this volatility could impact the operating margins, which are already under stress.

Indian IT companies, which bill predominantly in the dollar along with other currencies such as the euro, British pound, Australian dollar and others, have hedged their receivables around the ₹60-levels, while the rupee is trading at ₹63 to dollar, a 5-per-cent depreciation.

The Deutsche Bank report pointed out Infosys to be affected the least and TCS the most, with regard to this currency volatility.

HCL Technologies has already sent alarm bells ringing and in a note to the exchanges has said that cross-currency impact would be 210 basis points. However, some analysts like Shashi Bhusan, Senior Research Analyst (Institutional Equities) at Prabhudas Lilladher, believe strongly that currency volatility is one of many other factors. “We give weightage to volume of work, which is expected to go up to 4 per cent for large-sized IT companies,” he added. It is not only the volatile currency that is causing headaches to IT companies. There are larger concerns around a clampdown on discretionary technology spending, which, in turn is making companies to rethink on their technology-related investments.

“Large banks in the US having been subject to multi-million dollar fines, a not-so-good US retail spending and a sharp drop in oil prices, are all big factors in deciding the kind of spending companies would do going forward,” said Ashish Chopra, IT analyst, Motilal Oswal.

According to Bhusan, discretionary spending could be muted this year but if there are cost pressures, companies will outsource. Of the top companies, Infosys is expected to retain its 7-9 per cent yearly growth for fiscal 2015.