IT companies set to gain from falling rupee

BANGALORE: With the rupee sliding to a record low of 54.42 to the dollar, Indian infotech exporters will stand to benefit as it translates into higher revenues, depending on the extent of their hedging positions.

Rupee has depreciated by almost 10% since March, the biggest fall among the major Asian currencies. IT analysts tracking the rupee’s movement say the sharp depreciation will improve the margins of by at least 30-50 basis points on a conservative estimate.

Around 70% of IT companies’ revenues come from the US, hence a sizable portion of it is billed in dollars. A sharp depreciation of rupee will only translate into higher earnings for IT companies.

The currency has weakened due to rising concerns over the country’s current account and fiscal deficit. “The current account deficit has been increasing since April 2011 with imports rising faster than exports and deficit over balance of payment, supporting the demand for the dollar. With euro declining against the dollar and the dollar index gaining strength above 81 levels, we can see rupee hitting new low against the dollar,” said Abhishek Goenka, chief executive of India Forex Advisors.

But analysts say that a wrong hedging strategy can prove costly for the companies, which can incurr huge forex losses as gains from rupee’s depreciation will be wiped out. “The companies who would have hedged such dollar exposure can weather through this sharp rupee depreciation,” said Jagannadham Thunuguntla, strategist & head of research at SMC Global Securities.

Companies that take large hedge positions tend to incur relatively large forex losses. “The more aggressive companies tend to forefeit the benefits of a depreciating rupee. TCS, for instance, is more aggressive than Infosys in their hedging strategy,” said an analyst who didn’t want to be named.

Analysts say companies such as Infosys and Mind-Tree that hedge less than 50% of their dollar inflows stand to benefit in the case of a depreciating currency.