The Indian IT industry that had initially taken long term hedging as a strategy is now going cautious about its hedging strategy as the rupee volatility reaches its peak. The rupee, at 46.34 to a dollar, has surged 15% from its record low of 52.20 in March. On Wednesday, the rupee rose 0.2 % to 46.30 and it earlier reached 46.25, the strongest level since November 18.
One of the first movers, Infosys Technologies shifted to short-term forex hedging citing increased volatility in the currency market around the start of the financial year. V Balakrishnan, chief financial officer, Infosys Technologies, says the firm will be hedging for a shorter duration of next two quarters considering the volatility of the currency. ?We expect the rupee to be volatile and will hedge for a shorter duration of next two quarters. At any point in time the hedging position at Infosys is around $500-600 million,? he adds.
Keshav Murugesh, CEO at US-based Syntel Inc says, ?Initially, the firms were looking at hedging for a long term but now post the financial crisis most CFOs are avoiding it. This is also because economists feel that if the supply of dollar goes down in the US the rupee could again gain momentum.?
Outsourcing players like Aegis BPO have taken a currency neutral approach by earning and spending in the same currency. Aprarup Sengupta, MD & CEO, Aegis BPO said, ?We have always had a long-term strategy in a combination of hedging and business model. We have tried and been currency neutral in most part of our business and therefore we have always factored in the currency volatility.?
At the end of second quarter ending September 30, 2009, Infosys and Wipro posted gains in foreign exchange of Rs 85 crore and Rs 23 crore respectively. TCS reported a forex loss of Rs 113 crore and HCL Technologies reported exchange loss of Rs 151 crore. For the year ending March 2009, TCS reported forex loss of Rs 781 crore, HCL Technologies reported a loss of Rs 174.29 crore for the year, while Infosys reported a gain of Rs 372 crore.
This quarter, the currency has strengthened 3.8 %, one of the most-active currencies excluding the yen. Export driven industries like IT services and outsourcing largely have an impact on the gross margin once the rupee appreciates.
Analysts say that most firms have factored in the rupee at 46 to 47 and therefore there would not be much of an impact on the sector. ?The rupee appreciation will have some impact but IT stocks are still trading at good levels because of the improved volume growth and demand indicators. There will be some impact on the margins due to the translation but larger players do have flexibility in operations,? says Gaurav Dua, head research, Sharekhan Securities. Rajendra Kumar Shreemal, vice-president corporate treasury, Wipro Ltd says, ?We have adopted a approach were there is a minimum volatility on margins. Usually we take an approach for the next three to four quarters.? The hedging position at Wipro as of September 30, 2009 is at $1.45 billion.
Infosys say they have already factored the impact and every 1% gain in the rupee is 40 basis points impact on margin. ?We have taken this into account and have guided at Rs 47 so there will be no material impact on our guidance. We are also managing it by cutting on discretionary spends like travel,? says Balakrishnan.