Indian IT firms, which are diversifying into newer geographies to overcome a slump in the US economy, may be in for more pain because of volatile cross-currency movements.

The software industry, which has already taken a hit of more than Rs 500 crore (Rs 5 billion) in the second quarter because of the appreciating dollar against the rupee, will now be hit by adverse cross-currency movements even as they attempt to boost the share of revenue from the UK and the Eurozone.

Unfortunately, the hit will be despite attempts by software makers to step up hedging in the pound and the euro. The IT industry earns about 60 per cent of its revenue from the US.

The country's second-largest IT firm, Infosys [Get Quote] Technologies, is considering hedging in currencies other than the dollar. During a recent investors' conference, V Balakrishnan, chief financial officer, Infosys, said that the company will hedge against currencies, other than the dollar, that are important from a revenue perspective.

The average depreciation of the pound and the euro against the dollar was 4 per cent during Q2FY09, the depreciation has been sharper at 13 per cent in Q3 (until date), says a Motilal Oswal report. Depreciation of the pound and the euro against the dollar is expected to further erode the Indian IT firms' top line growth in the third quarter of FY09, say analysts. 

With nearly 50 per cent of working days already concluded in the Q3, the currency movements are expected to impact guidance numbers, Motilal Oswal said in a report. 'We believe this sharp cross-currency movement will put pressure on Q3FY09 dollar revenue guidance of Infosys and Satyam [Get Quote], unless a sharp reversal occurs in the remaining part of the quarter,' said the report.

Infosys had issued a guidance for Q3 revenue growth of 0.3 per cent (upper end) QoQ at an assumption of $1.86 per pound and $1.36 per euro. At the current rates, the report says that Q3FY09 dollar revenues will be negatively impacted by 3 per cent.

Indian IT firms' revenue in the pound and the euro are currently hedged in a very limited way. "Even if the IT firms want to hedge in the pound and the euro, they cannot do it as it's a structural issue,'' an Infosys company official said. They have to take the indirect route of hedging through euro-dollar-rupee. Once the multi-currency exchange starts, these firms will be able to take cover for these currencies as well," said an Infosys official.

"IT firms will have to look at their hedging policies again. Because of the rupee movement, IT firms will gain but the pound and the euro movement will certainly impact their dollar revenues. For TCS [Get Quote] and Infosys, we see a 2.9-3 per cent impact, we expect HCL Technologies [Get Quote] to have 4 per cent negative impact in the next quarter," said an analyst of a leading broking house.

While Europe and the UK is still a small market in comparison to the US, the proportion of revenue growth has been steadily increasing in the last couple of years. For Infosys, the revenue from Europe was 28 per cent at the end of the second quarter FY08. Similarly, for TCS 30.7 per cent revenue came from Europe, with 20.2 and 10.5 per cent from the UK and Continental Europe, respectively.

In terms of billing, the pound contributes 15 per cent to Infosys' revenue, 70 per cent comes in dollars, 7 per cent in the euro and 4.5 per cent from the Australian dollar. Similarly, for TCS, 60 per cent of its billing is in dollars, around 20 per cent in the pound, 7-8 per cent in the euro and 9-10 per cent in the Australian dollar.