Tata Consultancy Services expects foreign exchange gains to boost its profitability in the third quarter of this fiscal, traditionally a sluggish period for IT companies.
The country’s largest software exporter may record a forex gain of more than Rs 150 crore in the third quarter at the current foreign exchange rates, Rajesh Gopinathan, Chief Financial Officer, said at an analyst briefing.
In the second quarter, TCS had posted a forex loss of Rs 377 crore because of its exposure to ‘range forward options,’ a forex contract that uses a range of exchange rates rather than a single rate.
Losses can multiply if the rupee moves out of the range, like it happened in Q2, when the rupee depreciated to 68.8 vis-a-vis the dollar, analysts say.
Hedging policy Comparatively, the rupee has strengthened in Q3 and is trading between 61.9 and 63.8 to the dollar in the period up to December 17. TCS has not made any changes to its hedging policy. However, it did not give out the average rate for dollar hedges.
“This quarter, the rupee has appreciated and that is why we are seeing this kind of a swing. TCS has both forward and option contracts and hence it is difficult to figure out an average hedge rate for the entire portfolio,” said Sanjeev Hota, IT analyst with Sharekhan Securities.
The company — which had reported a record operating margin of 30.2 per cent in the last quarter — expects margins to be broadly stable in Q3. “Operationally, management expects to keep margins steady, though some currency tailwinds could aid margins by a modest 25-30 basis points,” Religare analysts Rumit Dugar and Udit Garg, said in a research report.
The third quarter is generally a weak quarter for software companies due to factors such as fewer working days, broad-based furloughs (a furlough is a temporary leave of some employees due to special needs of a company) across industries and lower project based spending by clients.
“The management expects the US and the UK market to show muted growth, while other geographies such as Europe, Asia Pacific and Latin America are likely to grow ahead of the company average,” said Ankita Somani, sector analyst with Angel Broking. The company’s India business could also show slow growth on account of reduced government spending in the run-up to elections. The domestic business contributes about seven per cent of TCS’ overall revenues.
Sequential growth However, the general consensus among analysts is that TCS may report a 2.7-3 per cent sequential growth in dollar revenues.
“TCS indicated that despite near term weakness, it remained confident of growth in the medium term as clients were heading into their calendar 2014 budgeting cycle, in a more confident position than in the past two years,” Kotak Institutional Equities said in a research report.