On the one hand, IT firms - which hedged themselves taking the view that the Indian rupee would continue rising against the US dollar - will have to bear a negative impact on the portfolio that has been hedged so far.
On the other, their top line as well as operating margins (EBIDTA) will get a boost since the rupee has depreciated by 2.5 per cent over the last three months (January 1, 2008 - till date).
In the trailing quarter ending December 31, 2007, the rupee was just about stable while it had risen against the US dollar by nearly 13 per cent over the last one year. Every percentage rise or fall in the rupee adds or subtracts 30 to 50 basis points from the bottom line.
"We do feel there will be a slight negative impact on the hedged portfolio but a positive impact on the EBIDTA margins. IT firms like TCS and HCL Technologies, which are hedged at a higher level, will have a larger impact as compared with Satyam and Infosys," Ashwin Mehta, senior research analyst, Mangal Keshav Securities, said.
TCS, for instance, had about $3.1 billion outstanding in hedges at the end of the third quarter but the forex impact due to the appreciation of the rupee was 1.61 per cent (primarily due to the Euro appreciation against the rupee).
Wipro had a hedging cover of $2.11 billion during the same period. Satyam, on its part, has a strategy to cover 50 per cent of the expected dollar inflows over the next 12 months. The company has hedged approximately $1 billion.
Avinash Vashishta, CEO, Tholons Advisory, explains: "The big companies have hedged strategically, so with movement of the dollar - even if they witness a 2-4 per cent loss by not exercising their hedge - the impact of the dollar appreciation is to the extent of 2.5 per cent. The company still benefits by 6 per cent. So the gain on the net result is about 3 per cent."
The big IT firms concur. Vadlamani Srinivas, CFO, Satyam Computer Systems, said: "Our hedges include forwards and options. Hence, it's not possible to give any specific rate. The rupee has been hovering around Rs 40 to Rs 40.60 for the last one month or so. It will not have any negative impact on the hedging portfolio."
Anil Chanana, executive vice-president (finance), HCL, says: "We have hedged around $2.3 billion already at an average rate of Rs 41, so the strengthening of the dollar against the rupee will not have any negative impact on us. We are safely hedged for the next 10 quarters. Going forward, we expect the rupee to strengthen but we expect such fluctuations."
Vashishta, however, feels that mid-cap IT firms will be badly affected. "Mid-caps have not got proper advice on hedging. They are ill-equipped to handle such situations so they are bound to lose out. Hedging is a complex derivative. Moreover, I expect the rupee to strengthen further. This is a temporary phase. The dollar might come down to Rs 39.50 soon."
His view is corroborated by Harit Shah, research analyst, Angel Broking, who says: "Mid-cap IT firms will certainly be impacted as the base is smaller."
"We have opted for plain vanilla forward covers. As the rates go up, we take into consideration additional exposure and accordingly increase hedging portfolio. A few paise rise will have no effect but if the change is around Rs 2-3 then it will have a negative impact. As of now, we don't see any negative impact," says R Srikanth, CFO and EVP Polaris Software.
Rostow Ravanan, CFO Mindtree Consulting also believes there will be no negative impact on the hedged portfolio. The company has hedged $130 million as of December 31, 2007 at a rate of Rs 42.
Nucleus Software had started hedging about five-six quarters back for periods ranging from one to three years. Vishnu Dusad, managing director, Nucleus Software Exports, says: "We have been selling in forward rates ranging between Rs 40-41. We are trying to create a balance right now, but if it does go up to Rs 42, it will impact our profits to an extent of 10 per cent or Rs 4-5 crore."
Hedging, meanwhile, remains a short-term phenomenon, according to analysts. In the long run, they aver, companies will have to increase their productivity to reduce the impact of such fluctuations.
Rupee on greenback
TCS had about $3.1 billion outstanding in hedges at the end of the third quarter ended December 31, 2007 but the forex impact due to the rupee appreciation was 1.61 per cent
Wipro had a hedging cover of $2.11 billion during the same period
Satyam has a strategy to cover 50 per cent of the expected dollar inflows over the next 12 months. The company has hedged approximately $1 billion
