Rupee depreciation positive for IT sector

The depreciating rupee to the dollar will have a positive impact of at least three per cent on Indian revenue for the top four Indian information technology services company, said analyst.

Every one per cent change in rupee-dollar has a 40 basis points impact on the margins and, at least, 2 to 3.5 per cent on the net profit numbers of IT services firm.

In terms of cross-currency movements, the dollar has appreciated across the euro, pound and Australian dollar in the second quarter of FY12.

Keeping this in perspective and assuming the currency positions at the end of September remains the same, the IT firms might see a marginally negative impact on the topline in the US revenue.

"In the second quarter of FY12, cross-currency impact on US dollar revenues is likely to be marginally negative (0.3-0.4 per cent), while significant gains (3.7-4.1 per cent) in other income on translation of monetary assets and liabilities to closing rates is possible, in our view, if the current currency rates were to continue," said Ashwin Mehta and Pinku Pappan, research analyst from Nomura Equity Research.

Rostow Ravanan, chief financial officer, MindTree, believes the real benefit of the depreciating rupee will only come if it remains at this level in the third quarter (ending December 31) as well.

"From a pure Indian revenue point of view, depreciating

rupee is good news for the industry. The real benefit will be visible only in the third quarter.

"That, too, if the rupee holds at this level. The bottom line, too, would be positive. Only in case where a company has hedged substantial amount of its revenue, will there be a negative impact. But I think the real picture would be the cross currency movement," said he.

A CLSA report said: "About 7.8 per cent depreciation in INR against US$ in the last 45 days and expectation of further depreciation in light of continued global risk aversion have raised hopes of earnings upgrades.

While a weaker currency is a positive for earnings, we believe that improvement in core business outlook needs to precede any out performance going ahead.

Business fundamentals have progressively worsened over the last few months with select vendors indicating delays in project starts and closure of deals."

The impact of the depreciating rupee on the bottom line will vary for each company as it would largely also depend on the hedging positions taken by these firms.

Analysts were of the opinion that companies like HCL Technologies and Infosys that hedge for a shorter duration and also have lesser hedged amount will see substantial gains.

Whereas, Tata Consultancy Services and Wipro, which do that for a longer duration and have over $1 billion in hedges, might see a marginal negative impact.

Though unlike 2008, IT firms might not see any forex losses this time.