Rupee to sting Indian IT this fiscal

Updated: Apr 7 2014, 20:44pm hrs
Indian RupeeRupee appreciation may take a toll on the Indian IT industry in FY15, with analysts predicting a 3-5% drop in earnings. Mid-cap players with sizeable offshore activities are likely to take the maximum hit
The Indian IT services industry, which is turning more confident about its growth prospects in the current fiscal, is also wary of any adverse impact on the forex front, especially the movement of rupee against the US dollar, which could upset their projections. The recent appreciation of the rupee against the dollar might become a cause of concern for the Indian IT industry in FY15 as any volatility will become burdensome for the companies when they are entering into a phase of making fresh investments in newer geographies and technologies.

Industry experts have raised a red flag after rupee recovered to 60.26 against the dollar, leaving a few creases on the exporters foreheads. The currency had plummeted drastically to 68.83 against the dollar in August 2013.

In the wake of the ensuing Q4 results and a positive growth forecast of 13-15% for FY15 by trade body Nassocom, brokerage firm Prabhudas Lilladher has a word of caution. The clients are struggling with increasing expectation from IT wherein their IT vendors should not only contain costs of existing services being offered, but also help driving growth led by technology. The volatile movement in the currency makes deal budgeting a challenge, the brokerage house said.

The direct impact of any adverse forex movement will be on their bottomlines. Prabhudas Lilladher has predicted a 3-5% drop in earnings of Indian IT companies in FY15, since a higher offshore presence would have a higher impact due to currency appreciation. Each percentage point appreciation in currency is likely to erode around 30-40 bps of Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins.

BNP Paribas in its report said, We forecast 0-3% US dollar revenue growth for our large-cap coverage in the March quarter, similar to the 1.6-4.4% growth in the December quarter and reflecting continued weak seasonality. We expect the highest q-q revenue growth for Persistent Systems, HCL Tech, Mindtree and Wipro, and q-q declines for Infosys and MphasiS. Several companies may report hedging losses in other income given the USD/INR strengthened late in the quarter.

The large multi-billion dollar Indian IT companies have already started feeling the heat of the swing in the forex market in terms of stock market movement. In March, Infosys shares depreciated close to 15%, TCS 7%, Wipro 8% and HCL technologies 11%.

The fourth quarter earnings season will begin with Infosys announcing the results on April 15, followed by TCS and Wipro. There would be a higher focus on the kind of commentary these companies provide on the year ahead.

Analysts expect divergent growth from the bigwigs with dollar revenues growing between -0.3% to 3% quarter-on-quarter. While TCS and HCL Technologies are likely to be in the top quartile, Wipros growth is expected to converge with peers.

In its report, Religare Institutional Research pegged the Q4 dollar revenue growth for TCS at 3.2% and Wipro and HCL Technologies at 3%. Infosys, which is striving to regain its leading position under executive chairman Narayana Murthy, might register a negative growth of -0.3% quarter-on-quarter. Infosys has attributed this to weakness in retail/CPG and hi-tech segments, skill mismatches leading to delay in ramp-ups and project cancellations. Noting that macro climate in the developing markets was improving, the report said: Given the recent management commentary, we expect Infosys guidance to be cautious, at 7-9% dollar revenue growth for FY15.

Experts instead expect TCS to be more consistent with revenues. Nomura in its report said though TCS India business continued to show a decline, it is likely to be lower than the decline in Q3 of 9% quarter-on-quarter in rupee terms. LATAM and Europe are likely to show better than company average growth and the US is likely to grow in line with the company average. In Q3, TCS reported a 2.1% quarter-on-quarter growth in constant currencies terms and management indications suggest to us a possibility of around 2% quarter-on-quarter growth, the report said.

The experts are, however, bullish on HCL Technologies, given that the company has added incremental revenues. We believe a 3%-plus quarter-on-quarter growth for HCL. Deal signings have been strong in the last four quarters with a cumulative deal TCV of $4 billion, the Nomura report said. It added that the forecast for HCL was perched on a positive management outlook for both IMS (driven by deal rebids) and core software, with no vertical-specific weakness highlighted barring telecom.

Contrary to the TCS, whose India revenues have taken a hit, Wipro has witnessed a strong traction in India. We build dollar revenue growth of 3% quarter-on-quarter for Wipro, Nomura said. Incidentally, Wipro has shown seasonal weakness in Q1 for the last three years, by posting less than 1% quarter-on-quarter growth in Q1.

Mid-cap players are likely to deliver a mixed dollar revenue growth. According to a Barclays report, Bangalore-based MindTree is expected to post a 3.4% quarter-on-quarter revenue growth in Q4, driven by traction in both hi-tech and IT services segment.

Despite these challenges, overall projection for industry growth is more positive in FY15 when compared to FY14. Nasscom had projected a 13-15% growth in software exports in FY15. It is to be seen whether the companies maintain the momentum with their Q4 revenues, which would be a tailwind to realize Nasscoms projection of $97-99 billion in export revenues, up from $86 billion estimated for FY14.

For the current fiscal year ending March, Nasscom had pegged the countrys software exports growth at about 13%. It had earlier forecast

a 12-14% range for exports in the 2013-14 fiscal.

However, the major players have assumed a cautious approach on Q4. The countrys second largest software exporter Infosys expects to be at the lower end of its FY14 guidance of 11.5-12% in dollar terms, while market leader TCS indicated that Q4 growth will be weaker than Q3, in line with seasonality.

It is to be seen whether the players can beat a fluctuating economy and carry forward their Q3 traction over to Q4, to realise Nasscoms aggressive projections. Nasscom banked on an increased demand from the US and Europe to drive exports this year, along with a gradual revival in consumer confidence, leading to return of discretionary spending. While the US continues to be the largest geographic market for India, accounting for 62%, highlight for the year will be revival in

demand from Europe, Nasscom had said in a

release in February.

Sayan Chakraborty