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Windfall gain for IT cos as Re plummets

1% fall in home currency will add 30bps to margins of IT services companies

Windfall gain for IT cos as Re plummets
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Windfall gain for IT cos as Re plummets 

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Blessing In Disguise

- In Dec qtr, IT cos faced margin pressure on rising wage cost amid high attrition level

- With resumption of travel and employees coming back to offices, expenses may rise in Q4

- Selling, general and administrative (SGA) expenses set to increase

- While weaker rupee and higher offshoring revenue supporting IT cos

Bengaluru: The fall of rupee against the dollar amid the ongoing war in Ukraine is likely to support the operating margin of Indian IT services firms, which otherwise are in a wait-and-watch mode owing to this global event.

Indian rupee has touched an all time low of 77 per dollar on Monday as crude oil prices touched $120 per barrel in the international market. On Wednesday, rupee was trading at… while crude oil price was at…. The Indian currency has depreciated 3.5 per cent against the US dollar in the first three months so far. With crude oil prices not hovering at the current level and pulling out of FIIs from emerging market, rupee is likely to remain weak in the recent months.

Analysts are of the opinion that this will provide margin support to Indian IT firms at a time they are facing cost pressure due to wage hike, and other expenses like utility costs. Usually, one per cent fall in the rupee adds 30 basis points to the margins of IT services companies.

"Definitely, falling rupee will provide some respite to Indian IT firm on the operating margin levels when the most of the SG&A cost is likely to come back in near future," said Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting.

In the quarter ended December, large IT companies have faced margin pressure on the back of rising wage cost amid high attrition level. Also, with resumption of travel and employees coming back to offices, expenses on these fronts are likely to be higher in Q4 of FY23 as compared to previous quarter.

Apart from falling rupee, offshoring revenues are also likely to be higher in the current quarter as some work from East European geographies are shifting to Indian locations amid the Russia-Ukraine conflict.

In the last two years, domestic IT services companies have seen decent rise in the offshoring revenues, supporting the operating margin levels. Infosys' offshore effort mix (projects implemented from India) went up to 76.2 per cent by the end of December quarter, a rise of 140 basis points over the same period of previous year.

Bengaluru-headquartered IT major, Wipro has seen offshore revenues going up by 240 basis points to 56.3 per cent by the end of Q3 of FY22. While rupee and higher offshoring revenue are likely to support the overall margin levels, analysts are of the opinion that the conflict has created an air of uncertainty with respect to future IT spends.

Debasis Mohapatra
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