Synopsis
The rupee lost 10% against the dollar in the fiscal year ended March 31 amid heavy FII outflow and soaring crude oil prices, making it the worst-performing among Asian currencies. Brokerages estimate a 3.0-3.5% depreciation in the currency in the fourth quarter alone.For these service providers making more than 60% of their revenue from the US, the rupee’s depreciation against the dollar amid geopolitical tensions would enhance revenue reported in the Indian currency, though it does not indicate any changes in operational performance.
The rupee lost 10% against the dollar in the fiscal year ended March 31 amid heavy FII outflow and soaring crude oil prices, making it the worst-performing among Asian currencies.
Brokerages estimate a 3.0-3.5% depreciation in the currency in the fourth quarter alone.
Analysts at HSBC anticipate revenue tailwinds of 0-50 bps for IT services companies, with the recent conflict-related developments having “driven a sharp depreciation in the INR, which provides material support to IT earnings”.
Margins are unlikely to disappoint for most companies, it wrote to clients. “The proliferation of AI should be margin accretive, in our view, but more so is that currency is a significant tailwind.”
Motilal Oswal estimates a 10- to 50-bp boost for the five large-cap service providers—Tata Consultancy Services, Infosys, HCLTech, Wipro and Tech Mahindra, and an 80- to 90-bp benefit for smaller companies like Zensar and Cyient. Morgan Stanley, ICICI Securities and Kotak Institutional Equities estimate the impact to be flat to 60 basis points.
Despite the currency tailwinds, brokerages estimate a muted quarter for the $297 billion IT services sector, with revenue forecasts ranging from a 0.5% fall to 3.5% growth sequentially on an average, as the currency tailwinds get partially offset by large deal ramp-up costs, wage hikes and hedging losses.
“We note that in large cost takeout deals, AI-led productivity benefits are front-loaded and pose a risk to margins if an IT company is unable to realise these benefits over the course of the deal,” ICICI Securities said.
The brokerages also estimate the weaker rupee to support operating margins of companies. Morgan Stanley estimates the benefit to be 10-70 bps for large-cap companies sequentially, while Kotak projects 40-320 bps year-on-year for the top six companies.
Both Motilal Oswal and ICICI Securities project Coforge to have the highest margin expansion, between 130 and 160 bps, due to the absence of headwinds from wage hikes and furloughs.
Kotak said high hedging losses for mid-tier companies could limit the margin benefits. “Large companies have marginal hedging and will result in immediate translation of currency into earnings. A few companies such as LTM, LTTS (L&T Technology Services), Coforge, Persistent and Hexaware have hedges varying from 12 months to three years and will report hedge losses,” it said.
Analysts at Morgan Stanley also highlighted that while companies could show good margin trends, helped by currency, “much of this could be reinvested with a focus on managing transition periods better and accelerating revenue growth and market share gains”.
