At a time when IT services firms are facing cost pressure of various kinds, a depreciating rupee against the US dollar is likely to provide the much-needed support to their operating margins in the second quarter of FY20.
But cross currency fluctuation, especially a weakening pound, is expected to erode some of the gains, say experts. “The recent weakening of the rupee will be a major tailwind for the IT sector, as other cost pressures are increasing,” Sanjeev Hota, head of research at Sharekhan.
Every 1 per cent fall in the rupee’s value against the dollar helps in around 20-25 basis points improvement in earnings before interest and taxes (EBIT) margin. “Moreover, ensuing reset in the rupee-dollar exchange rate could upgrade the earnings estimates of IT firms for FY20 and FY21,” he added. The rupee has fallen around 4.7 per cent since July 1 and is hovering around 72.40 against the dollar on Tuesday.
The Indian currency, which is one of the worst performers in Asia this month, had fallen 3.65 per cent against the dollar last month. This is the steepest monthly decline in six years.
“Given the volatile situation globally, IT growth is likely to be lower than FY19. There are a lot of cost pressures like visa-related expenditure, rising subcontracting cost apart from continued price pressure on the legacy business. In this environment, the rupee is seen as one of the mitigating factors,” said Harit Shah, senior research analyst at Reliance Securities. However, strengthening of the rupee by 30 basis points against the pound during this period is likely to eat into these gains, to some extent. “Appreciation of the rupee against the pound and euro will negate some benefits, depending on the extent of billing in pounds,” said another Mumbai-based research analyst.
Currently, Tata Consultancy Services (TCS) is the only Indian IT firm which provides UK-specific revenues.
In the first quarter ended June 30, the Mumbai-based firm drew 15.8 per cent revenue from the UK, while its revenue from continental Europe stood at 14.3 per cent.
During the last quarter, the company received 54 per cent of its revenue in US dollars while around 14 per cent was in pound and around 10.5 per cent in euro.
For Infosys, Europe contributed 23.6 per cent to its revenue while Wipro drew 24.6 per cent of its revenues from the continent. Although these firms don’t provide UK-specific numbers, the island nation continues to be one of the biggest markets for the Indian IT sector.
“TCS can keep benefiting from the falling rupee due to its competitive position in the market while many other Indian firms may like to utilise some gains by giving higher wages to staffers in order to check attrition,” said the Mumbai-based analyst.