The Hindu Business Line : Rupee depreciation offers breather to IT companies

New Delhi/Mumbai, May 13 The weakening of the rupee against the greenback has spelt relief for the Indian IT industry whose operating margins are set to improve, although it may translate into one-time hedging losses for certain companies.

“Every one per cent depreciation in rupee, positively impacts the operating margins by 30-basis points. Given the depreciation of five per cent since we gave our guidance in April, it is good news from operating margin perspective,” the Satyam CFO, Mr V. Srinivas, said.

He said the company currently has over $700 million in forex hedges. “We are in a wait-and-watch mode. We may have some hedging loss but it will be compensated by translation gains arising from foreign currency assets,” Mr Srinivas added. The rupee has hit a 13-month low at 42.10/11 against the US dollar.

Margins may improve

According to a market analyst who did not wish to be named, the depreciating rupee would help margin of tech companies. “However, in the interim, companies that have hedge receivables may incur hedging losses. This is because they would have contracted in the forward market to sell dollars at, say Rs 39-40, while the spot rate will be higher at Rs 41 or more. Therefore, these companies may have hedging losses for the quarter, but in general it is good for margins,” the analyst pointed out.

Another industry observer noted that the hedging losses would be higher for companies that had taken a longer term hedging positions. “Infosys, for instance hedges for two quarters, while some of the other IT players are hedged anywhere between 4-6 quarter,” he said.

Mr Sonjoy Anand, Chief Financial Officer, Tech Mahindra, observed that for IT companies to benefit, the depreciation should last for a longer period of time.

“Every quarter we do mark to market. So, if the rupee depreciates, the overall operating performance will gain, but the value of our hedges will decline. Similarly, when the rupee appreciates, even though operating performance is impacted, the value of the hedges improve....We believe that at some stage capital flows will resume and so our long term view is that the rupee will continue appreciating,” said Mr Anand.

Relies on crude

However, if crude continues on its upward march, companies will have to be prepared for further rupee depreciation, cautions Mr Anand.

Mr RS Desikan, Group Chief Financial Officer, Mastek Ltd – which has forward cover for about $20-25 million at any given point of time – said that rupee depreciation will not immediately assist the company as Mastek has a hedge cushion for the next 2-3 months.

For May and June, the company has already sold dollars at a pre-determined rate. If this depreciation is maintained, it will give Mastek a better rate on dollars it sells in July, added Mr Desikan.

Nasscom feels that the industry would prefer a stable and predictable rupee. “However, a weak rupee will surely offer a breather to smaller companies who are not hedged,” Mr Som Mittal, President of Nasscom, said.