The weak rupee could propel Tata Consultancy Services to log record operating margins for the second quarter ending September 30.
However, the gains could be diluted by a significant jump in foreign exchange losses related to TCS’ hedging position, according to analysts, who attended the company’s briefing last week.
The general consensus is that the company will report operating margins of about 30 per cent against 27 per cent posted in the preceding quarter. This, according to a Kotak Institutional Equities report, would be the ‘highest ever’ margins for the company.
“Q2 will be a bumper quarter for TCS with margins 30-31 per cent. Most of the gains associated with the rupee depreciation will flow into EBIT, even though the company may choose to reinvest some of the gains in the business,” said Sanjeev Hota, IT Analyst at Sharekhan Securities.
The rupee has fallen 15 per cent since May 22, when the US Fed first indicated that it may start cutting its bond buying programme earlier than expected. Companies such as TCS stand to benefit from the rupee depreciation as they earn a lion’s share of revenue from US-based clients.
If the rupee remains at current levels, TCS will reinvest the benefits in the business over the medium term as opposed to giving pricing discount to clients, said Angel Broking’s IT Analyst, Ankita Somani.
Forward options
However, TCS’ exposure to ‘range forward options’ may result in the company logging hedging losses. A range forward contract provides protection against adverse exchange rate movements, while retaining some potential upside in case the currency appreciates.
“Losses can multiply in case (the) rupee moves out of the range, which has actually materialised in the recent quarter,” the Kotak Institutional Equities report said.
If the rupee trades in the 65-68 range to the dollar, the company will report a forex loss between Rs 550 crore and Rs 700 crore, analysts said.
More than fifty per cent of TCS’ hedges are in the form of range options, said Sharekhan’s Hota. The company is said to have used these since they are cheaper compared to other forex instruments. However, TCS did not give out the rupee range it had gone in for.
On the demand side, the company retained its bullish view, outlining that the second half of the fiscal will be better than the first, said Angel’s Somani. Growth is likely to be robust across industry verticals barring telecom, which according to the management, is going through ‘structural difficulties’.