Information technology may have taken a 1.5% rupee-hit on bottomline

Raj Nambisan, Rabin Ghosh & C Chitti Pantulu

MUMBAI/HYDERABAD: Information technology budgets in the US may not be showing signs of drastic cuts despite signs and talk of a slowdown in the world’s largest economy, but the better news for Indian information technology firms is the rupee’s rebound.

The rupee was down 1.6% — the biggest intra-day slide in 11 years — on Thursday as importers rushed to buy dollars and the Reserve Bank of India flexed its dollar buying muscle.

Forex dealers had, in a survey by DNA Money on Thursday, said they expected the currency to weaken in the next quarter to the 44 per dollar range.

Will Thursday’s decline in the rupee throw the software Cassandras — who have been predicting a drop in margins for the fourth quarter ending March — off their pedestals?
Unlikely, because the rupee had risen as much as 2.71% from January 1, 2007, till Wednesday — three days before Q4 ends, said analysts.

This rise threatens to cut down Q4 profit by up to 1.5% and margins by 40 to 60 basis points (100  basis points is equal to 1 percentage point), according to analyst estimates.

The Big Four of Indian IT — Tata Consultancy Services, Infosys Technologies, Wipro and Satyam Computer — are highly dependent on the US market.

As much as 70% of their revenue comes in dollars, a quarter in pound sterling and 5% in euros. They have been trying to derisk their business models by focusing more on Europe and Japan, but the benefits of this will take time to kick in.

Bhavtosh Vajpayee and Anirudha Dange of CLSA Asia Pacific Markets, in a note on Thursday said Infosys’ guidance for the next financial year (to come with Q4 results on April 13) will be based on the closing value of the rupee on March 31, 2007.

But a major upturn in the rupee after March 31 could force the company to change this base date and, therefore, the guidance, they said. Considering the scenario, they think an EPS (earnings per share) guidance of 22-23% from Infosys is more realistic with 25% being on the optimistic side.

But the rupee’s gains in Q4 have been less than what it was in October-December — the dollar had fallen 3.5% then, leading to an EPS compression of 100-200 basis points for software firms. In Q4, the decline till Wednesday has been only around 2%.

Ashwin Mehta of Ambit Capital said therefore the scale of damage would be slightly lower in Q4. Normally, there is a 30-40 basis points margin impact for every 1% change in the rupee.

"The impact on operating margin, therefore, is expected to be in the range of 40-60 bps and revenue impact would be around 1.3-1.5%, depending on  growth," Mehta said in a note to clients.

CLSA's Vajpayee and Dange said where hedging of currency goes, for the March quarter, Wipro is at high risk of net loss in other income. Wipro had halved its forex hedging to just $188 million during the December quarter itself. They said TCS, HCL Technologies and Satyam are far better off on this count, while Infosys is marginally underhedged.

Technology firms mostly hedge 3-4 months of their net dollar receivables. Hedging helps them offset the losses suffered due to a falling dollar. When the dollar falls, or the rupee rises - as it is currently doing, - IT firms get less rupees for their dollars when converting.

But there are other positives that could mitigate the pain, points out Sanjiv Hota, analyst at Emkay Shares. "Business in Q4 is traditionally better than Q3 (Q3 has fewer working days and hence lesser billable manhours), higher billing rates, and (manpower) utilisation," Hota said. Ambit's Mehta believes it is difficult for shares to match their historically high price-earnings ratios considering other negatives such as wage inflation, declining return ratios and Ebidta margins. And select midcaps may do better on operational yardsticks compared with the biggies, he said.

 Meanwhile, in a late report to clients on Thursday, Citigroup economist Rohini Malkani and analyst Anushka Shah said the rupee's recent appreciation was largely the result of tight domestic liquidity. A sudden increase in overnight money rates to 60% or more after the March 15 advance tax deadline forced domestic banks to sell dollars to raise rupee resources. They predicted choppy trading the currency, with the trading range moving up from Rs 43.75-45 to Rs 42.75-44.