Falling rupee is a silver lining for IT companies

For IT firms whose earnings are denominated in dollars the depreciation is a relief

India's Rupee plunged an all time low of Rs. 57.30 against the Dollar on Friday. Photo: Mohammed Yousuf

The rupee, on the slide for the seventh successive week against major international currencies, has hit the economy hard. But, as always, it is a silver lining to the outsourcing businesses, particularly the IT sector that is grappling with shrinking margins in a depressed global market.

For Indian IT services companies, whose earnings are denominated in dollars, the depreciation comes as a “relief”, says Rishabh Sahni, an employee of a mid-size Bangalore-based IT services firm.

Volatility

In the aftermath of the global financial crisis, many companies had resorted to hedging a portion of their dollar-denominated earnings to protect themselves from the volatility in the foreign exchange market. Hedging, which works like an insurance policy, however, also comes at a price. Companies that had suffered “hedging losses” because of the sharp deprecation of the rupee, may not benefit entirely from the slide, observes Mr. Sahni.

It will also vary from company to company, depending on the position they had taken (about the exchange rate) and the extent to which they had hedged, he pointed out.

“However,” he said, “hedging strategies employed by most industry biggies will mean that the impact is not necessarily immediate for most companies. The hedging losses are likely to partially offset the positive impact, but this will vary from company to company.”

Stock prices

Analysts and industry insiders say the current quarter is likely to be a good one for most Indian IT services companies because the depreciation started in May. Their stock prices are thus likely to be on an upswing, they predict.

Ankita Somani, research analyst with Angel Broking, said: “Every percentage depreciation translates into a 30-45 basis points (a basis point is one-hundredth of a per cent) gain in operating margins for IT companies. So their profit margins will certainly go up, and this holds true for companies, irrespective of size.”

Any losses they incur because of hedging would be more than compensated by the gains that will result in higher profits, Ms. Somani says.