Rupee fall may not help IT companies in Q1

Mark-to-market losses due to the unexpected fall of the rupee against the US dollar, euro and pound; the impact of wage increases in the first quarter; a stagnant global economy; and margin pressure owing to inflation are expected to impact the rupee-term fortunes of Indian IT firms that will declare their quarterly results for the April-June 30 quarter beginning this week.

Rupee fall may not help: Plagued by a rising rupee against the dollar for almost a year, Indian IT firms faced the opposite, but happy, situation during the April-June quarter, when the rupee depreciated by 4.7 per cent on an average quarter rate (AQR) basis and 7.3 per cent on an end of period (EOP) basis. The rupee ended lower against the euro too by 9.1 per cent (7.4 per cent EOP) and 4.2 per cent against the pound (7.4 per cent EOP). 
 

GROWTH IMPULSES (Forecasts for Q1, 2008)
Company	Revenue (%)		Net Profit (%)
	Q-o-Q	Y-o-Y	Q-o-Q	Y-o-Y
TCS	5 - 6	22 - 25	0.1 - 0.6	6 - 8
Infosys	6 - 9	22 - 31	(2.7) - 6	12 - 22
Wipro	5 - 17	40 - 50	5	23
Satyam	10 - 11	45 - 47	5 - 13	29 - 39
Source: Analyst estimates in rupee terms. The variance is due to the inclusion of other income by some analyst firms.

Every percentage rise or fall in the rupee reduces or increases operating margins respectively by between 30 and and 50 basis points (bps). Hence, the fall will benefit firms (in rupee terms) that have hedged the least such as India's bellwether and second-largest IT services provider, Infosys Technologies, and Satyam Computer Services.

Other firms whose hedging strategies have gone awry are expected to post mark-to-market (MTM) losses. However, TCS "" which hedged over $2 billion "" is not expected to be impacted significantly since it has its cover in options (rather than forward contracts).

Wipro Ltd and HCL Technologies are expected to be hit the most since they have hedged $3.5 billion and $2.7 billion respectively. Satyam Computer Services is expected to be the best performer in the quarter since it does not implement wage increases in the first quarter.

Mid-tier companies that are sufficiently/fully hedged could also be affected due to MTM provisioning. Analysts see firms like Hexaware, Geometric, and Sasken reporting substantial notional loss in the current quarter. Other small- and mid-caps could benefit from the currency movement due to poor hedging, yet their benefits would be negated due to lack of scale and a poor demand environment.

Other pressures: With uncertainty in the US markets (the largest for most IT firms), there's a lag in firming up deals which implies that the third and fourth quarters could be better.

However, Edelweiss analysts caution against such expectations. Moreover, salary increases and visa costs, note SSKI India Research analysts, could have an impact of 200 basis points (bps) on operating margins.

Managing costs and moving up the value chain: IT firms, meanwhile, are doing their best to work around the situation. The larger Indian vendors are seeing advantages of outsourcing multiple processes, applications and/or infrastructure to a single provider. They are offsetting the pressures in the BFSI segment from traction in telecom "" Infosys and Wipro "" and manufacturing (Satyam).