Rising Re may hit IT firms' Q3 earnings

Forward covers may soften blow

The rising Indian rupee may impact the earnings of Indian software companies this quarter. The Indian rupee has gained about 4 per cent against the dollar in the last two months and close to 2 per cent of the gain came in the last week.

The thumb rule here is that a 1 per cent increase in the value of the rupee against the dollar has a 50 basis point impact on the operating margins of software companies.

The December quarter earnings of Indian companies slip as the number of working days in the US come down because of more holidays. This affects the billing of companies that have a high proportion of time and material projects as compared with fixed bid projects.

Says a Mumbai-based fund manager, "Most Indian infotech companies have taken forward covers but only a portion of their earnings are hedged. The rise in the strength of the rupee will definitely dent the bottomline and to a large extent this will depend on the amount of cover that these companies have gone for and the rates at which these covers have been taken."

Software companies that can get hit the most are those that have a very high dollar receivables position and ones which do a very high percentage of their work offshore and not on site.

The Bangalore-based Wipro Technologies had taken a $1 billion cover in January this year when the rupee was at its volatile best.

According to a senior Wipro official, the company has taken forward cover for the next five quarters and it had contracted this cover at rates between Rs 44 and Rs 45 to a dollar.

"As of now, we are covered for the dollar-rupee leg, but one cannot fully cover oneself against the volatility in the markets," he said.

A Satyam Computer Services spokesperson told Business Standard that a rise in the rupee would normally lead to a fall in operating margins and also the value of the industry's exports.

"A rising rupee will mean that profitability can be impacted though the volume of work will not," he said.

Typically, Indian software companies hedge their earnings against such exchange rate fluctuations but the period of cover taken can vary. Some companies take it for a quarter while some others can cover themselves for a full year.

"Offshore wages represent only 17 per cent of our global cost base; as such the dollar-rupee exchange fluctuation does not hit us that hard," said Gordon Coburn, CFO, Cognizant Technologies, in a recent earnings call with investors.

In the last three quarters, the dollar-rupee exchange fluctuation had led to Cognizant making a $300,000 foreign exchange gain in the first quarter ended March 2004, a $80,000 foreign exchange loss during the quarter ended June and a $260,000 foreign exchange loss during the quarter ended September.

The rupee weakened against the dollar today and closed at 44.15 compared with 44.10/12 yesterday.