The rupee may be sliding down, but India’s IT firms may be cruising up. After all, most of their money comes from exports — which are now earning more rupees for every dollar earned by the simple fact of a 12.81% depreciation in the currency since April.
About 66% of India's IT and IT-enabled service revenues come from exports.
The benefit of the rupee slide — and some expect more in the coming weeks — will definitely come in for the likes of Infosys, Wipro, TCS and HCL Technologies. Analysts estimate they can expect a 25 to 40 basis points (or 0.25 to 0.40 percentage points) rise in their profit margins.
But don't expect windfall gains yet. This is because the gains of the rupee's slide may be blunted by currency hedging done by IT companies under which they pay premia in financial markets to stabilise dollar-rupee exchange rates to cushion themselves from an appreciation in the rupee. The hedging losses can vary on a deal-to-deal basis.
A recent report by Goldman Sachs says that Wipro has hedged around 32% of its revenues for dollar revenues during 2013-14, TCS close to 25% and Infosys around 14%.
"Other things remaining equal, every one percentage point fall in the rupee should lead to a 25 to 40 basis-point improvement in the EBIDTA (earnings before interest depreciation and amortisation profit) margins of IT Services companies," said Ajay Srinivasan, director of Crisil Research. However he added that this does not usually happen as fundamental business conditions such as demand growth, competition, pricing power and utilisation influence both growth and profitability.
"Overall bottom-line (profits) of the company will definitely be aided during this quarter (April-June) as currency, on an average basis, for the full quarter has depreciated. In addition, most of the IT companies realise their rupee revenues towards the end of every quarter and June was the month where the rupee witnessed maximum volatility with sharp depreciation," said Ankita Somani, IT analyst at Angel Broking.
However, if the rupee continues its downhill journey, clients may use it as an opportunity to renegotiate deals.
But things are not hunky dory for India's IT.
Dipen Shah, head of research at Kotak Securities, said there is considerable unease over the proposed Immigration Bill in US, which may weigh on the sector.