Rupee's free fall may force IT cos to revisit hedging strategy

Written by fe Bureau | Bangalore | Updated: Aug 22 2013, 14:46pm hrs
The rapid depreciation of the rupee against the US dollar is likely to increase the stress on the hedging strategies of Indian IT companies, which are caught offguard with this kind of volatility in the forex market. With the rupee at nearly 64 against the US dollar, a large number of Indian IT companies could rework their hedging strategies.

A senior official at a leading IT firm told FE that while a falling rupee looks beneficial, the nature of volatility does not help IT companies. We build our revenue model based on a certain value of the rupee and any wild swing creates havoc in our system, he said. As a thumb rule, a 1% change in value of the rupee against the US dollar has an impact of 30-40 basis points on the operating margins of a company.

The current value of the rupee could leave many IT companies exposed as they dont have enough forex cover for their incoming revenue. Indian IT companies follow differing forex strategies, with some of them entering into long-term contracts while others take short- term positions. For example, Infosys takes forex cover of three to six months while Wipro undertakes hedges at various levels of the rupee. TCS adopts the cash flow hedging strategy.

This differing forex hedging strategy is also reflected in the kind of gains or losses each company makes on their exposure. TCS for FY13 had a forex gain of R155.29 crore while it suffered a loss of R156.90 crore in FY12. Infosys made a forex gain of R169 crore for FY 12 but it got reduced to just to R34 crore in FY13.

At the end of the first quarter of FY14, Infosys had a net loss of $13.4 million on the forex front primarily due to cross-currency movements while its hedges stood at $1.173 billion. In the case of Wipro, it had hedging positions to the tune of $1.9 billion. Today, Indian IT companies will also have to deal with cross-currency issues as their revenues come from other regions outside of US such as the euro, yen and the Australian dollar.

Shashi Bhushan, IT analyst, Prabhudas Liladhar, said the rapid depreciation will have negative impact on the hedging positions of the IT companies. Pradeep Mukherji, president and managing partner, Avasant, an offshore advisory firm, told FE that the rupees depreciation on an overall scale will certainly bring about gains for the sector though the actual benefits could vary from company to company depending on their hedging strategies. Industry observers said that, historically, Indian IT companies have outperformed the market when the rupee is strong or stable and not when it is the other way around.

The volatility in the forex market also reflects on the stock prices of leading IT companies. TCS, which was showing continuous gains due to the rupee fall, declined 1.06% while Infosys also fell by 1.79%. Market observers believe the IT stocks were being overvalued primarily due to the rupee fall.

Bhushan of Prabhudas Liladhar said the rupee movement will be a one- or two-quarter phenomenon having a short-term positive impact while a company's performance will eventually depend on the fundamentals.

Jagannadham Thunu-guntla, strategist & head of research, SMC Global Securities, likens the falling rupee to cherry on the cake. If the cake size does not grow, the cherry does not make a difference.