Shares of HCL Technologies tanked 4% on Wednesday, a day after the IT major said that adverse currency movements may hurt its March quarter dollar revenue by upto 280 basis points. The impact permeated to other IT players which came under pressure, with the BSE IT index losing more than 1% of its value even as he benchmark Sensex ended he session up 1.1%. IT giants Infosys and TCS ended in red with the former losing 2% of its value.
On Tuesday, HCL Tech said that since its revenue is derived in multiple currencies and significant costs are in rupee, ebit for the January-March quarter would have an adverse impact of nearly 80 basis points. The Shiv Nadar-founded firm is set to announce its quarterly results in the fourth week of April 2015, following its peers TCS and Infosys that are slated to announce their numbers of April 16 and April 24.
HCL’s guidance reflected muted street expectations from the IT sector. Analysts forecast low dollar revenue growth due to seasonal weakness while cross currency headwinds are likely to weigh on margins. The last quarter of FY15 is likely to see impact of reduced number of working days and the usual delays in project ramp-up at the beginning of the calendar year.
According to Nomura, the dollar revenue of top five IT service majors may be weighed down by 200-260 bps in the March quarter although impact on the FY15 revenue growth may be marginal 50 bps, barring HCL Tech for which the brokerage pegged the impact at 230 bps.
In the three months to March 2014, the US dollar observed a strong rally with the the dollar index gaining more than 7% for the second consecutive quarter. While the average value of the euro and pound declined by 10% and 4% against the dollar sequentially, the average rupee value weakened by a marginal 0.4% q-o-q to 62.3.
There are also concerns that the FY16-FY17 consensus estimates for IT earnings may see substantial downward revisions, if the current forex rates, including strong stance of the Indian rupee persists.
In a recent strategy note, Citi highlighted several factors that could drive the valuations of IT players in FY16 including whether the revenue guidance for the industry would improve in the year compared to FY15 when larger companies have lagged the Nacsscom guidance of 12%-14% growth in dollar revenue. While the absolute upside for the sector may be limited, given that most sectors are currently expensive, even valuations of IT companies may continue to remain elevated.