Indian IT firms face currency headwinds

If you thought the rise in the US dollar was all good news for Indian software exporters, which make most of their revenue in that currency, think again.

The dollar surged to a 20-year high against a bunch of currencies last week after data showed US consumer price inflation at a 40-1/2-year high in June, prompting talk of more interest rate hikes by the Fed and a potential recession in the world’s largest economy.

The recession fears boosted demand for safe havens and led to the strengthening of the dollar against many currencies including the euro, pound, yen, franc, krona and the rupee.

While the $190 billion worth of the Indian IT industry is likely to benefit from the depreciation of the rupee, the dollar strengthening against all major currencies has also stoked fears of cost inflation, which may lead to demand slowdown across those geographies.

“Rupee fall definitely helps Indian IT players as it supports operating margin. But dollar strengthening against all major currencies may not augur well as it may push cost pressure for enterprises in Europe and other geographies,” Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting, told DH.

“Units of Indian IT firms that are operating in Europe and serving global customers may face pressure on earnings due to the weakening of local currencies,” he added.

“IT companies also have near-shore centres operating in Eastern Europe and Canada. So, we have to see what is its material impact on companies’ cost given that wage cost and other expenses are likely to be higher,” he added.

Usually, a 1% depreciation in the rupee improves operating margin by 15-30 basis points for Indian IT companies. This is because most of them draw more than 50% of their revenues from the United States, where billing is done in dollars.

Europe accounts for around 20-30 per cent of the total revenues of large and mid-tier IT companies. While the rupee has been falling against the US dollar, it has been appreciating against the euro, pound and yen in recent months.

“Rupee to a dollar helped because of rupee depreciation (in Q1 of FY23). But Euro to Dollar, JPY to Dollar, and even JPY to rupee; all depreciated. So, there were both headwinds and tailwinds,” said Amit Chadha, CEO & MD of L&T Technology Services.

Brokerages agreed.

“Indian IT companies face cross-currency headwinds emanating from 5%, 6.6%, and 1.7% appreciation of USD against EUR, GBP, and AUD, respectively, in Q1FY23. Optically, rupee depreciation may appear as a positive, however, cross-currency headwinds have ensured only a marginal tailwind for the quarter,” Kotak Securities said.

Some looked at it differently.

“We don’t see any material impact of cross-currency movement on demand. If there is cost pressure on clients due to cross-currency movement, we will have a conversation with clients about how we will take out some of the cost. That can be a great opportunity for us,” Venu Lambu, Mindtree’s Executive
Director & President, Global Markets, told DH.