A jump in foreign exchange losses may dilute gains resulting from the weak rupee for software companies.
The hedging positions taken by individual IT companies could determine whether they will report a foreign exchange gain or loss for the quarter ended September 30, say analysts.
Forex loss
“Most IT companies may post a forex loss this quarter, as they were hedged in the Rs 58-60 range. However, on a net-to-net basis, second quarter will be a robust quarter for Indian IT companies compared to first quarter,” said Ankita Somani, sector analyst, Angel Broking.
During the quarter, the rupee went up from Rs 59.6 on July 1, to an all-time high of Rs 68.7, before settling at Rs 62.55 on September 30.
“The forex gains or losses on the profit and loss side are a function of multiple things — what is the exchange rate at the end (of the quarter), how the contracts are hedged, what particular derivative instruments are used and at what price,” said Farid Kazani, Chief Financial Officer of Mastek.
Kazani did not comment on whether Mastek would record forex gains for the quarter ended September 30, 2013.
Software companies are expected to announce their earnings for the second quarter ended September 30, 2013, beginning with Infosys’ results on October 11.
“The benefits from the rupee’s depreciation are likely to be offset to a great extent due to the hedge positions we had taken,” said Pratibha Advani, Chief Financial Officer, NIIT Technologies.
She, too, did not get into details of the rate at which the company had taken the forward cover. At the net profit level, the Noida-based company is likely to register hedge losses, while there would be translation gains in its pre-tax earnings, said Advani.
“Any forex losses that we may have will be on account of forward contracts maturing during the quarter, although that should get offset by translation gains, which we report as part of other income,” Advani added.
On the other hand, RPG Group company Zensar Technologies expects to post forex gains. “Today, 80 per cent of our receivables are covered at an average rate of Rs 60. As long as the rupee is over the 60 range by second quarter-end, we would record moderate forex gains,” Ganesh Natarajan, Chief Executive Officer, had said in an interview to Business Line recently. The trick, according to Natarajan, is to refrain from focussing on making that extra buck through currency movements.
“Even when the rupee rose to 68 (vis-à-vis the dollar), amidst talk that it may hit 70, we continued with our conservative hedging strategy. If the rupee would have ended at historical highs this quarter, then maybe we would have made some losses. But, now that the rupee has come back to Rs 62 levels, our strategy seems validated,” Natarajan added.
Last month, the country’s largest software exporter, Tata Consultancy Services, said that it may report forex losses between Rs 550 crore and Rs 700 crore, if the rupee trades in the 65-68 range. This was largely due to TCS’ exposure to ‘range forward options,’ a class of derivatives that tend to provide protection against adverse exchange rate movements, even as it retains a potential upside if the currency appreciates.
Testing new waters
“A lot of new things were being tried out by companies because of the high level of uncertainty and volatility. These experiments have a higher risk as its more like testing new waters,” said Sanjoy Sen, Senior Director, Deloitte Touche Tohmatsu, a research and advisory firm.
The general consensus among analysts is that TCS would report operating margins of about 30 per cent against the 27 per cent posted in the preceding quarter.