Indian IT services companies could see improvement in margins by as much as 100 basis points in their second quarter results due to the depreciating rupee against the US dollar, based on factors such as level of offshoring and hedging policy, say analysts.
Companies such as Infosys, Tata Consultancy Services, HCL Technologies, Wipro and Tech Mahindra and Mindtree each have different hedging policies and that is one of the key factors to determine gain from a fall in the Indian currency.
A higher exposure to offshoring also results in immediate gains due to the depreciating India currency.
On Monday, the Indian currency closed at a record Rs 72.46 after touching an all time low in intra-day trading at Rs 72.67 against the dollar. “There are multiple aspects and not just the hedging policy; one for example is the level of offshoring you have, more offshoring means lower natural hedge and that means higher benefit to currency depreciation. Second is margin profile, let’s say TCS has rupee depreciation benefits of 25 basis points. Now their margin is also 25%. This means 1% benefit to absolute EBIT. Whereas if I look at Tech Mahindra, they have 35 basis point sensitivity on 13% margin, so the delta is 2.5 to 3 times, unlike TCS, where the delta is one time,” said Kuldeep Kaul, an analyst at ICICI Securities.
While a weaker rupee helps in short-term gains for companies, the business fundamentals is the key for determining a company’s value, he added.
Infosys, TCS, Wipro, Tech Mahindra and HCL Technologies declined to comment for this story.
Analysts at the Kotak Institutional Equities (KIE) said: “Infosys, TCS and Mindtree do not have meaningful cash flow hedges and will benefit immediately from INR depreciation.”
“LTI, Tech Mahindra and Mphasis are aggressively hedged and will not derive meaningful near-term upside,” they added.
Companies such as Infosys, Tata Consultancy Services, HCL Technologies, Wipro and Tech Mahindra and Mindtree each have different hedging policies and that is one of the key factors to determine gain from a fall in the Indian currency.
A higher exposure to offshoring also results in immediate gains due to the depreciating India currency.
On Monday, the Indian currency closed at a record Rs 72.46 after touching an all time low in intra-day trading at Rs 72.67 against the dollar. “There are multiple aspects and not just the hedging policy; one for example is the level of offshoring you have, more offshoring means lower natural hedge and that means higher benefit to currency depreciation. Second is margin profile, let’s say TCS has rupee depreciation benefits of 25 basis points. Now their margin is also 25%. This means 1% benefit to absolute EBIT. Whereas if I look at Tech Mahindra, they have 35 basis point sensitivity on 13% margin, so the delta is 2.5 to 3 times, unlike TCS, where the delta is one time,” said Kuldeep Kaul, an analyst at ICICI Securities.
While a weaker rupee helps in short-term gains for companies, the business fundamentals is the key for determining a company’s value, he added.
Infosys, TCS, Wipro, Tech Mahindra and HCL Technologies declined to comment for this story.
Analysts at the Kotak Institutional Equities (KIE) said: “Infosys, TCS and Mindtree do not have meaningful cash flow hedges and will benefit immediately from INR depreciation.”
“LTI, Tech Mahindra and Mphasis are aggressively hedged and will not derive meaningful near-term upside,” they added.
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