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Weaker rupee benefits IT firms
Atul Sathe in Mumbai | July 24, 2006 12:57 IST
Last Updated: July 24, 2006 13:44 IST
Infotech companies are making the most of a depreciating rupee and have systems in place to hedge the risk inherent in forex earnings.
With over 90 per cent of the revenues of Indian IT companies coming from clients abroad, the rupee's downward trend over the past few quarters is boosting the power-packed results of the sector.
The June quarter results are a case in point and are in line with the good quarters witnessed so far. The results have been as per expectations of market watchers and IT majors including Infosys, Wipro, TCS and Satyam have posted a q-o-q top line growth in the range of 2.5 to15 per cent and a bottom line growth of 2.8-24 per cent during the quarter.
Even as companies in the sector are expected to benefit from the depreciating rupee for another quarter or two, an upward trend in the rupee subsequently could be taken care of by hedging practices that most companies are putting in place, say analysts.
Since IT companies derive a bulk of their revenues in dollars, rupee depreciation adds to their bottom line.
Taking into account the expenses incurred in dollars owing to on-site operations, a one per cent fall in the rupee usually results in a 0.3-0.4 per cent gain in the operating margins of most IT companies, and vice-versa.
Meanwhile, the ongoing depreciation in rupee is likely to continue for a while before seeing any signs of reversal.
Jamal Mecklai, CEO of Mecklai Financial & Commercial Services says, "The current trend may continue for a couple of quarters, after which the rupee could strengthen again."
Mecklai adds that while the weaker rupee augurs well for Indian IT companies, most of them are developing policies to hedge the risk inherent in forex earnings, should the Indian currency start firming up again.
Hedging forex risks
According to a Nasscom and Mecklai Financial survey conducted some time back, over half the companies surveyed, considered forex to be among their top two risks.
In other words, tech companies have more to gain from a depreciating currency and less to lose from an appreciation. Most companies have strategies under which they hedge over 50 per cent of their foreign earnings. Many companies have about 25 per cent of the foreign risk in non-dollar exposures.
During Q1 FY07, the rupee has depreciated by 5.4 per cent to 46.99 against the dollar and most IT majors saw forex gains. Infosys posted gains of Rs 53 crore (Rs 530 million), Satyam Rs 45 crore (rs 450 million), TCS Rs 40 crore (Rs 400 million), while Wipro's IT division posted a forex loss of Rs 4 crore (Rs 40 million) and its IT-enabled services division posted a gain of Rs 15 lakh.
In Q4 FY06, the rupee inched up by one per cent. During Q3 and Q2 of FY06, it fell by 2.13 per cent and 1.22 per cent and rose marginally by 0.48 per cent in Q1 FY06.
Analysts say that most IT companies reflected this depreciation in rupee with forex gains, although lesser than those seen in Q1 FY07. The results for these quarters were also good.
Apart from a depreciating rupee, analysts attribute the good performance of IT companies to factors like strong volume growth in business and increased client penetration.
For instance, the volume growth of Infosys has improved 8.5 per cent q-o-q in Q1 FY07 as compared to a growth of 6 per cent q-o-q in the previous corresponding quarter.
Pratish Krishnan of Emkay Share & Stock Brokers expects the volume growth to be in the range of 7-9 per cent in the coming quarters.
How the biggies fared
The June quarter numbers of most IT companies were strong, even as the first quarter is considered to be weak quarter for IT companies. Infosys posted a 15 per cent q-o-q growth to Rs 2,867 crore (Rs 28.67 billion) in net sales and a 21 per cent growth in net profit to Rs 805 crore (Rs 8.05 billion).
Revenues from the company's top five clients grew 14 per cent q-o-q. The company's client concentration has been high with 20 per cent of its revenues coming from these five clients.
The company would continue to focus on such big clients, which spend over a billion dollars on IT every year, according to analysts.
Another software major, Wipro, posted a 2.5 per cent growth in IT revenues to Rs 3,130 crore (Rs 31.30 billion) and a 2.8 per cent growth in net profit to Rs 614 crore (rs 6.14 billion), while TCS' top line and bottom line grew by 12 per cent and 6.2 per cent respectively.
Satyam Computer's top line grew by 10 per cent, while its net profit shot up by 24 per cent.
Wipro's global IT business revenues grew by 7.1 per cent q-o-q. The company added 60 new clients during the quarter and the management believes that the environment remains conducive to offshoring. The company added 3-4 multi-million dollar deals, whose ramp-up would start next quarter.
In case of TCS, even as the margins were affected in Q1 due to salary hikes and visa costs, those for the full year would be in line with FY06.
Analysts believe that the bigger IT companies have the capacity to absorb an increase in salary expenses. Improving offshore revenues, large deal ramp-ups and cost efficiencies could also help, according to Krishnan. The demand environment continues to be strong in both, the US and Europe.
According to analysts, the company has been trying to diversify geographically, even as the US continues to be a major market. In Q1, it posted a strong 29 per cent q-o-q growth in revenues from Europe, as against just 9.3 per cent growth from America.
Outlook and valuations
According to analysts, Infosys is expected to touch net sales of over Rs 13,500 crore (Rs 135 billion) in FY07 and a net profit of over Rs 3,500 crore (Rs 35 billion).
Wipro is expected to reach net sales of about Rs 14,000 crore (Rs 140 billion) and a net profit of about Rs 2,700 crore (Rs 27 billion), while TCS numbers are pegged at over Rs 18,100 crore (Rs 181 billion) and Rs 3,800 crore (R 38 billion) respectively in FY07.
On trailing 12 months earnings, Infosys trades at 32.37x, Wipro at 28.43x and TCS at 27.2x.