The depreciating euro and British pound (GBP) against the dollar are expected to reduce the Indian IT sector’s revenue by 1.3-2.4 per cent for the quarter ending June 30.
Both the currencies have depreciated against the US dollar. While the Euro depreciated by 7.7 per cent on quarter-to-date (QTD) basis against the dollar, the GBP depreciated by 4.2 per cent. The euro today slid further to the lowest level in over four years against the dollar over concerns that European measures to reduce fiscal deficits will delay recovery.
Analysts believe that even if the downward trend continues, it will only marginally impact the top-line of Indian IT servics firms. “From a business perspective, this is not a concern, as Indian firms have very little to no presence in the geographies where the crisis is maximum — Greece, Spain, Portugal. But the top-line is expected to get impacted due to currency movement. In terms of dollar revenue, we see an impact of 0.5 -1 per cent,” said an analyst of a brokerage firm on condition of anonymity. Moreover, revenues in GBP are more than euro and the GBP has been relatively stable to the dollar.
Tier-I IT Service providers (ISPs) with an exposure of around 15-27 per cent to Europe (invoicing-wise revenue) would be impacted by 1.3-2.4 per cent QoQ on the dollar revenue front, states Subhashini Gurumurthy of Ambit in her report.
After the global slowdown, Indian IT firms had increased their focus in the Europe region to hegde themselves from the over-dependence on the US market. This was also to act as a natural hedge against the dollar, which still is the currency of dominance for billing.
Analysts believe while this might not have an immediate impact on the business, it does affect sentiment. For instance, UK according to Gartner’s forecast on enterprise IT spending for 2010, was expected to witness a growth rate of 3.8 per cent for 2010, while Germany was expected to grow by 3.2 per cent. For France, it was 4.3 per cent and the Nordic regions, 4.2 per cent. While Benelux is expected to clock a 4.6 per cent growth rate.
In terms of the impact on earnings per shate (EPS), analysts opine it will depend on the hedging cover. “Our analysis indicates that HCL Tech with the highest exposure to Europe (26.7 per cent of revenues) would have the maximum impact of -2.4 per cent QoQ on US dollar revenue growth (assuming closing rates), while Infosys with the lowest Europe exposure at (22.5 per cent of revenue) is relatively better placed with a -1.3 per cent QoQ impact,” said Gurumurthy in her report.
