All you wanted to know about constant currency

The only constant in life is change, or so they say. As the rupee continues to decline against the dollar, falling to 70 levels recently, you may find investors and analysts debating two different sets of numbers for companies from export-driven sectors such as software, pharma, textiles — one result based on ‘constant currency’ and the other based on the actual realised exchange rates.

Results based on ‘constant currency’ show how a company would have fared for the quarter or year, had exchange rates between the rupee and the dollar (or euro or yen) not changed at all during the periods being compared. Swings in the rupee’s exchange rate against a foreign currency can make a big difference to the growth numbers of export-oriented companies. They can bolster profit margins as well.

But here is where investors and analysts need to watch out. The healthy growth figures in the reported currency may have nothing to do with the underlying business. So, companies like to strip out the effect of exchange rates on their numbers and report them on a ‘constant currency’ basis to inform investors how they really performed. Such numbers are calculated after assuming a fixed exchange rate for the dollar, euro or pound against the rupee.

Constant currency growth can be a better indicator of how a company’s core business is faring than its reported numbers. For instance, for software companies constantly answerable to analysts and the media, constant currency growth has been a lot better than their reported fluctuating currency growth in the recent June quarter. Wipro, HCL Technologies, Infosys and TCS reported sequential revenues that grew in the range of minus 1.7 per cent to plus 1.6 per cent in the June quarter. But on a constant currency basis, those figures were much better at 0.2-4.1 per cent, with TCS leading the pack as usual.

Most exporters, including IT companies, deliver their services in the US and Europe and bill clients located in different geographies in different currencies. The major billing currencies are the US dollar, Euro and British Pound. In the last year and specifically over the past six months, the dollar has gained against all the major currencies of the world. The rupee too has declined heavily against the dollar. This makes it quite important to analyse the results without currency movements in the equation.

Most companies tend to highlight whichever numbers make them look good.

Investors thus need to be cautious for taking informed decisions. The present weakness in the domestic currency means that rupee growth in revenues would look much better than what the underlying business fundamentals suggest.

Tuning in to constant currency reporting does have its advantages. IT companies always tend to give their guidance in constant currency dollar terms. For example, Infosys has guided for 6-8 per cent revenue growth for FY19 in dollar terms and an operating margin of 22-24 per cent.

If constant currency numbers exceed the actuals, the indication is that business traction is good, as is the case with the Indian IT pack currently.

Investors, however, must keep in mind that stock valuations are based on only the numbers actually realised. Most analysts, however, tend to dwell on which numbers present the most realistic picture for a company. As an employee in an IT company too, you may be interested in knowing how it is doing. Constant currency reporting helps you gauge if the firm you’re working for has good prospects.

Look for constant currency reportage to get a realistic sense of where a business is headed.

COMMENT NOW