Till recently a good number of IT—IT-enabled service firms would secretly enjoy the dollar getting stronger. For, a strong dollar would mean more rupees. Not any longer.
The companies have begun to have a serious relook at their hedging strategies that have gone for a toss of late.
In 2007, Infosys used to hedge for a whole year, but all that has changed recently. It now hedges for two quarters. Mahindra Satyam made a loss of Rs 59 crore in the fourth quarter last year. Infotech took a hit of Rs 6 crore last year, while NIIT Tech reported a loss of Rs 13 crore on this count. TCS discontinued its long-term hedging strategies recently.
A one per cent depreciation of the rupee aids margins of IT companies by 30-40 basis points. Infosys has $80 million in hedges, TCS has $1.3 billion and as on December, Wipro hedged $1.8 billion.
Normally, a one per cent fall or rise in the rupee against the dollar either increases or decreases margins of firms anywhere between 0.3 per cent and 0.5 per cent. “However, all IT firms hedge part of their expected export revenues to guard against violent fluctuations and lend a semblance of predictability to revenues,” Mr Ajay Bodke, Head (Investment Strategy and Advisory) of Prabhudas Lilladher, said.
Layered hedging
Others feel that these gains will be ploughed back. “Benefits from rupee depreciation will be reinvested into the business,” said Ms Ankita Somani, Research Analyst (IT and Telecom) of Angel Broking, said.
Mr Sonjoy Anand, Chief Financial Officer of Tech Mahindra, has said it has a layered hedging strategy and takes cover up to five years. “The objective is to mitigate volatility from currency fluctuation. Our hedging strategy has delivered well last year,” he said.
“Our medium term view on the currency at the moment is that it will remain weak till strong policy action is taken in areas like fiscal deficit and growth bottlenecks in infrastructure and other areas,” he said.
Infotech said it didn't believe in speculative hedging. It has taken forward cover of about Rs 50 against dollar, Rs 68.5 for euro and Rs 78 for a pound for 2012-13. “We hedge 70 per cent of net forex earnings for next 12 months,” Mr B.V.R. Mohan Reddy, Managing Director of Infotech, said.
Zensar follows a ‘plain vanilla' forward covers at the end of each month.
“Typically we cover anything between 40 per cent and 60 per cent and leave the rest open,” Mr S. Balasubramaniam, CFO of Zensar, said.
NIIT Technologies hedges 100 per cent of net exposure for next two quarters, 50 per cent of third quarter and 25 per cent for the fourth quarter.
“We are re-looking at the hedge strategy to de-risk ourselves from a depreciating rupee,” Ms Pratibha K Advani, CFO of NIIT Tech, said.
“We follow the layered hedging policy, where we hedge 20-40 per cent of inflows over the next one year. As on quarter ending March 31, 2011, our hedges stand at $1.3 billion. We will continue to follow the layered hedge policy,” an HCL spokesperson said.
(With inputs from Ronendra Singh in New Delhi and Venkatesh Ganesh in Bangalore)