The euro’s steep fall has become a major deterrent for the Indian IT industry’s quest to make further inroads into Continental Europe, industry watchers say.

While Tata Consultancy Service, Infosys, Cognizant and others were upping the presence in Europe last year, the common currency weakened by over 24 per cent against the US dollar and the rupee.

Half the depreciation (12 per cent) happened in the fourth quarter ended March 31, 2015.

“The large Indian firms will be feeling the impact as incremental revenue for the industry is coming from Germany, the Netherlands and other major Euro economies,” said Ankita Somani, Sector Analyst at MSFL Research. A weak euro means lower rupee realisation in IT engagements. Large IT firms generate 5-20 per cent revenue from Europe.

The euro has been losing ground to its global peers since the European Central Bank announced late last year that it was launching its own quantitative easing programme. Economists also attribute the currency’s decline to ECB’s record-low interest rates, seen as a way of fighting the Euro Zone’s creeping deflation. Recently, the euro hit a 12-year low against the dollar.

Strategy change

“The free fall of the euro means companies will have to make changes to their planning and costing strategies. The depreciating currency is a sign that doing business could get tougher as economic growth in the Euro Zone is not happening as expected,” said Alok Shende, Principal Analyst at Ascentius Consulting.

In the past few years, software majors have been buying European companies in anticipation of an economic recovery from the longest-ever recession in the Euro Zone.

They have been signing multi-million euro outsourcing contracts in the region.

Recently, Ganesh Natarajan, Vice-Chairman and CEO of Zensar, said cross currency movements in this quarter will hurt companies with a larger European exposure.

Will IT companies tweak their strategy towards Continental Europe, given that the US market is showing signs of getting back to optimum health?

“There could be a shift from the Europe to the US from a marketing angle, but not from the perspective of client concentration. Indian firms will continue to focus on existing customers in Europe as it is important to have year-on-year relationships even through difficult times,” said Hanuman Tripathi, Managing Director of Infrasoft Technologies, a mid-size IT firm.

TCS, leader of the pack

TCS, said to be the leader of the pack when it comes to revenue from Continental Europe, benefited from earlier investments in that market.

“TCS is the prime beneficiary of high growth in Europe. It has a 42 per cent share of the incremental revenue generated in the last 12 months,” Sagar Rastogi, analyst with Ambit Capital, said in a note two months ago.

A TCS spokesperson did not comment on how the falling euro will impact the company as it is in the silent period prior to reporting Q4 numbers later this month. In fact, cross currency movements may push the top IT firms to report a negative impact of 180-250 basis points in Q4 dollar revenue, MSFL’s Somani said.