Opinion

Constant currency

K VENKATASUBRAMANIAN | Updated on January 23, 2018 Published on April 27, 2015

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In life, nothing is constant. But constancy does help in some situations. Ask the software companies that report two sets of numbers; one result based on ‘constant currency’ and the other based on actual realised currency rates.

What is it?

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 period. Swings in the rupee’s exchange rate against a foreign currency can make a big difference to the growth numbers of export-oriented companies.

But because such swings are entirely out of the firm’s control, and have nothing to do with the underlying business, companies like to report their numbers on a ‘constant currency’ basis, to tell investors how they really performed. Such numbers are calculated after assuming a specific exchange rate for the dollar, euro or pound against the rupee.

Why is it important?

Forex markets can be as volatile as the stock markets. Constant currency reporting can thus help shed light on a company’s real performance, shorn of the forex effect. For all the software players, revenue growth on a ‘constant currency’ basis this time around, is a lot higher than the numbers reported in the official results.

For example, in actual terms, TCS, Infosys, Wipro and HCL Technologies reported sequential revenues that either fell or remained flat (minus 2.6 per cent to nil) in the March quarter. But on a constant currency basis, those figures turn positive, with the growth even going up to 2.7 per cent for some players.

Most exporters, including IT companies, sell their services in the US and Europe and bill clients located in different geographies in different currencies. Usually, the billings are in the US dollar, the Euro and the British Pound. In the last one year and specifically over the past four months, the euro has weakened considerably against the dollar. From 1.4 levels, the euro has weakened to around 1.07 to the dollar. The rupee too has remained relatively strong against the dollar. This adverse currency movement thus has sent company revenue and profit projections haywire.

Why should I care?

Software company results usually set the tone for the entire earnings season for corporate India. And the top-tier IT companies usually deluge you with disclosures. If you’re an investor interested in how the company is doing, pay close attention to whether the numbers are actuals or based on ‘constant currency’. Most companies tend to highlight whichever numbers make them look good.

Constant currency reporting does have its advantages. If constant currency numbers trump actuals, it indicates that business traction is very much there, just that adverse currency is playing spoilsport. For investors however, it is actuals which may sway stock prices. Valuations are based on only the numbers actually realised. Most analysts, however, tend to dwell on which number presents the most realistic picture for a company.

As an employee in an IT company too, you may be interested in how it is doing. (You may get a sizeable portion of pay as employee stock options, for example). Constant currency reporting helps you gauge if the firm you’re working for is in good shape.

The bottomline

When the exchange rates turn favourable for exporters, don’t forget to look into their ‘constant currency’ numbers.

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Published on April 27, 2015
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