HCL warning for March quarter

Expects dollar revenue to dip by 280 bps due to currency volatility

Shares of HCL Technologies, the country’s fourth-largest information technology (IT) services company, dropped 3.8 per cent on Wednesday after it said cross-currency fluctuation was expected to affect revenue to the extent of 280 basis points (bps) in the January-March quarter.

The shares closed at Rs 943.40 on a day when the BSE benchmark, the Sensex, rose 303.65 points to close at 28,260.14.

HCL derives revenue in multiple currencies and incurs a significant portion of its cost in rupees, an overall sectoral trend. In a recent report, brokerage firm Karvy had said currency headwinds would adversely impact the numbers of all major Indian IT firms in dollar terms for the March quarter and in 2015-16.

“The dollar has strengthened considerably against key currencies like the euro, pound and Australian dollar, given the improving US economic data and likelihood of the US Federal Reserve increasing rates later this year. We expect a 320-600 bps impact on IT firms’ dollar revenue growth in FY16 owing to dollar strength, even as volume growth estimates remain unchanged,” it said.

The dollar has gained 10 per cent against the euro, four per cent against the pound and eight per cent against the Australian dollar this quarter. Over the past year, the appreciation has been 20 per cent, seven per cent and 18 per cent, respectively. The rupee has also appreciated against these currencies but not depreciated significantly against the dollar.

“Top-tier IT firms will lose $188-680 mn in revenue, while mid-sized IT firms will lose $25-30 mn in FY16 on account of (this) dollar appreciation,” the report said. It added HCL Technologies would see the least impact, of 350 bps, as it has a June-ending financial year.

In Wednesday's note, HCL also said earnings before interest and tax (Ebit) would also be impacted by 80 bps in the quarter. However, it expressed confidence in achieving a 21-22 per cent Ebit. Although, it said, it was expecting a foreign exchange loss of $5.5 mn, covering both cash flow hedges and mark-to-market (repricing at current valuation) of the foreign currency assets and liabilities.

The company has been sending pre-earning advisories to the stock exchanges and analysts since the earlier quarter. For the December 2014 quarter, HCL had also said there would be an adverse impact of about 210 bps on its revenue, due to strengthening of the dollar against various global currencies. However, the company beat analysts’ expectations to report a 6.2 per cent growth in dollar revenue, its highest in 16 quarters.

While HCL will announce its financial results on April 21, the results season will be inaugurated this time by the sector leader, Tata Consultancy Services, which will report its financials on April 16. In a break from the tradition of being the first to report results, Infosys will announce its numbers on April 24, from Chennai, where its board of directors is meeting.

Despite the subdued commentary on revenue, analysts do not expect changes in the volume growth estimates. “Given improving growth in the US market, sustained demand strength in Europe, led by the run in business services and expansion of services in newer geographies like the Middle East and Southeast Asia, we expect demand growth to remain robust for IT firms,” said the Karvy report.