Re fall a breather for IT cos
Home currency against greenback breaches 78 mark; Depreciation of Re1 adds 30bps to operating margins of IT firms
No Negative Surprises in Q1
- Q1 of FY23 results on expected lines
- Generally, slowdown comes with a lag of 4-6 mths
- So, fears of recession in the US, which is likely to be hit by end of 2022
- However, EBIT margins trending down from inflation
Bengaluru: Indian IT companies are likely to get some respite in the operating margin front with rupee breaching 78 per dollar in recent days. Industry veterans said even the cross-currency basket comprising dollar, Euro, Pound Sterling and many more will have some positive impact on the margin side as dollar remains the dominant currency of the total basket.
"Rupee depreciation against dollar will definitely help because more than 60 per cent of billing of large and mid-tier IT firms is in dollar. So, despite some weakness in Euro, the cross-currency basket will support operating margins of IT firms," V Balakrishnan, Chairman of Exfinity Ventures & Former CFO of Infosys told Bizz Buzz.
Rupee has again breached 78 level on Tuesday and slipped to yet another record low of 78.40 against USD on Wednesday as the Indian currency remained under pressure on consistent selling by FIIs. Usually, one rupee depreciation in rupee provides 30 basis point margin support to Indian IT companies.
"Though rupee is depreciating and costs from travel and other utilities are rising with normalcy coming back in operations. Also, Euro basket may not be supportive of margin in the June quarter. However, overall margin impact is likely to be positive," said Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting. On the likely performance of first quarter results (April-June) period, experts said that despite fears of slowdown, Q1 of FY23 results may not have any negative surprises.
"If you see the IT sector, any slowdown comes with a lag of four to six months. So, the fears of recession in the US, which is likely to be hit by end of the year, will not reflect on the performance. Perhaps, we may see it towards December or early next year," said Balakrishnan.
Recently, global financial major JP Morgan has downgraded Indian IT sector.
"We see peak revenue growth behind us and EBIT margins trending down from inflation, mean reversion. While the bottom-up outlook remains positive from most Services, Software and SaaS names YTD, and the tech spending cycle remains buoyant structurally, we feel there are more downside risks to current earnings assumptions," said JP Morgan in a note.
Another expert also has a similar view on this matter, though deal pipeline may see some slackening in June quarter.
"Given the robust deal pipeline, revenue growth is not likely to see any negative impact. However, new deals addition will be critical to gauge the health of the overall IT industry. We feel that new contracts may see slower additions," said Jain of Pareekh Consulting.
Rupee depreciation against dollar will definitely help because more than 60 per cent of billing of large and mid-tier IT firms is in dollar. So, despite some weakness in Euro, the cross-currency basket will support operating margins of IT firms
- V Balakrishnan, Chairman of Exfinity Ventures & Former CFO of Infosys