IT: Timely hedges protect

While developments in the euro zone are a concern, there is no need to hit the panic button as revenue traction remains.

The crisis in Europe and a dipping euro are clear concerns for the information technology (IT) sector. Since April 1, 2010, the euro has fallen almost 12 per cent and the pound has dropped 5.2 per cent against the dollar. This means companies will get less dollars for their euro- and pound-based revenues. However, analysts and company managements are still not duly concerned.

This is because depreciation of the euro and pound looks exaggerated if spot rates are considered. On an average basis, the depreciation is five per cent for the euro and two per cent for the pound. Moreover, hedges will restrict the extent of losses caused by the euro zone currency volatility. Major IT companies have just 22-27 per cent exposure to the euro zone. Moreover, the Indian rupee has also dipped against the dollar at an average rate of 1.4 per cent during the current quarter. This, more or less, nullifies the cross-currency volatility. Analysts expect the sector’s revenues to dip 0.4-0.5 per cent, which has already been factored in by most companies like TCS and Infosys.

HCL Tech may be affected more, as 27 per cent of its revenues come from the euro zone, say analysts at Ambit Research. Here, both pound and euro invoicing have an equal proportion. TCS’s 25 per cent revenues come from the zone, but only eight per cent are in euro and 12.5 per cent in pound. Euro and pound invoices for Wipro and Infosys are lower. The exposure to PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries is also less.

TCS, which sources 15 per cent revenues from the UK, believes this could increase, given the thrust on cost-controls and, therefore, offshoring.

Analysts expect that the quarterly growth of four-six per cent should continue. The focus point will then be the attrition rate, which is catching up again. Also, the 8-14 per cent salary hikes may have a negative impact on margins.