The report explains that as of March 2004, Infosys had forward cover of $180 million, which the company has since increased to $250 million at an average of Rs 44.6/$. Since the companys forward contracts are marked on a mark-to-market basis, the depreciation of the rupee should result in a minor loss on hedging, but will be more than compensated by a translation gain if the rupee closes at 45/$ for the June quarter. At those levels the company will have a net forex gain of Rs 35 crore for the first quarter of FY05 against a net forex loss of Rs 26.8 crore in the fourth quarter of FY04.
Smith Barneys FY05 EPS (earning per share) estimate for Infosys is expected to be higher by 3.1 per cent and 7.1 per cent in the event of the rupee stabilising at 44/$ and 45/$ respectively.
Wipro, the report stated, has been the most aggressive in its hedging strategy. As of March 2004, the company had a forward cover of $950 million at an average Rs 44.1/$, which has since been increased further. Large parts of the forward contract, around $600 million, are designated to client inflows and would be booked over a period of time as those inflows materialise. The balance $350 million are not designated and would be marked to market. If the exchange rate remains at and closes the quarter at Rs 45/$, Smith Barney estimates Wipro will net a forex loss of Rs 6.3 crore (the translation gain of Rs 29.4 crore nullified by hedging loss of Rs 35.7 crore) for the quarter. Further, the company would have a hedging loss of around Rs 31.5 crore for the rest of the year, the report added.
Smith Barney states that Wipro should benefit the least in an environment of weak rupee, at least in FY05, and its EPS estimate for this fiscal is expected to be higher by 1.5 per cent and 2.8 per cent in the event of the rupee stabilising at 44/$ and 45/$ respectively.
Any change in the outlook for the rupee has a notable impact on the profitability of the Indian IT services sector. The report points out that during the last two weeks of the March quarter, the rupee unexpectedly appreciated by three per cent leaving most Indian companies with huge forex translation losses for the quarter and more importantly a three per cent lower exchange rate expectation for FY05. While FY05 guidance for companies like Infosys and Satyam is based on exchange assumption of Rs 43.5/$, Smith Barneys FY05 estimates assume a year-end exchange rate of Rs43/$. Besides Infosys, the report points out that Satyam and HCL Techs hedging portfolios are the most aligned to a weak rupee environment.
Satyam, they state, has a forward cover of $40 million as of March 2004, which the company has since increased to $130 million at an average of Rs 44/$. The report explains that the since the company marks to market forward contracts, the depreciation of the rupee should result in a minor loss on hedging but will be compensated by a translation gain. If the exchange rate remains at and closes the quarter at Rs 45/$, it estimates Satyam will net a forex gain of Rs 9.8 crore (a translation gain of Rs 18.2 crore nullified by hedging loss of Rs 8.4 crore) in the first quarter of FY05 against an forex loss of Rs 20.8 crore in the fourth quarter of FY04. Smith Barneys FY05 EPS estimate for Satyam is expected to be higher by 2.1 per cent and 6.7 per cent in the event of the rupee stabilising at 44/$ and 45/$ respectively.