Rupee at 80 to the dollar: IT services and tech industry to get a leg up

As the rupee touches 80 to the dollar, the extent of gains for Indian companies may differ basis their exposure to non-US regions and the performance of their currencies

The Indian IT services and technology industry has been the biggest gainer of a depreciating rupee as it earns in US dollars and other foreign currencies. Since the US contributes more than 50 per cent of the revenue, any fall in the rupee increases their earnings.

This also aids their margin performance. A 100-basis point (bp) fall in rupee against the US dollar means a 30 bp operating margins benefit.

However, the US dollar strengthening versus other currencies like GBP, Euro, Yen, and Australian Dollar negatively impacts the Indian information technology (IT) services industry. After the US, UK and Europe are the largest markets for the sector.

This impact was evident on the margins of several IT firms which recently announced their April – June quarter (Q1 FY23) numbers. For instance, India’s largest IT services player Tata Consultancy Services (TCS), has a 30 bp impact of the USD dollar strengthening versus the Indian rupee. But it could not see a big positive impact on margins as the dollar strengthened against other currencies and the supply side pressure eroded the profitability gains.

Samir Seksaria, chief financial officer (CFO) at TCS, post the results, said that the cross-currency movement and the US dollar strengthening against other currencies did not allow much gains, but the overall impact was a positive 30 bp.

Vinit Teredesai, CFO, Mindtree, agreed that while the dollar strengthening against the GBP and Euro had a negative impact on revenue, the dollar strengthening against the rupee benefited the company’s EBITDA (earnings before interest, tax, depreciation and amortisation).

“INR hitting 80 versus the USD may sound margin-positive in the short run, but it must be understood that it will come with inflation, which is not good in the medium to long run. It is difficult to predict where INR will settle, but volatility is expected to reduce in the coming months unless a major geopolitical or macroeconomic event happens,” he added.
 

While IT companies have exposures in all the major G5 currencies, the majority of their exposures are denominated in USD/INR. IT companies have a systematic hedging programme to hedge their exposures, explains Hemal Shah, partner & leader, Corporate Treasury, EY.

“IT companies have set realisation targets for all these currency pairs and would accordingly stack up their hedge ratios given the volatility in these pairs. IT companies also keep a threshold of their exposures unhedged in extreme volatile times to benefit from higher spot movements. In case of INR, though the forward premium has come down, spot volatility has given another set of opportunity for companies to capture higher spot rates and in the current scenario, psychological level of 80 is being targeted to stack up hedges,” said Shah.

However, the falling rupee is not good news if companies have a substantial part of their business from India or revenues in other currencies. Take the Larsen & Toubro Infotech (LTI) case, which said that its constant currency revenue was impacted as the US dollar strengthened against Euro.

“On a constant currency basis, our revenue would have been $586.6 million. The overall currency impact was $6.4 million. The US dollar strengthened against the GBP, mostly the European currencies. We have about 25 per cent of our revenue in non-dollar denominations. Hence we have had a negative impact; we also have India business,” said Sudhir Chaturvedi, president, sales and executive board member, LTI.

On the rupee touching the 80 threshold, Shah of EY said: “Rupee is facing problems on both the current and capital account side. The external environment and Fed decisions are also keeping USD in good stead, and so the pressure on Rupee will remain. The rupee is forced to test the psychological level of 80. FPI and FDI flows have also slowed down which in earlier times helped RBI mop up USD whenever it tested lower levels.”