Tata Consultancy Services (TCS), India’s largest IT services exporter, is likely to record a forex loss in excess of Rs 500 crore for the second quarter of the current fiscal, despite the rupee recording a significant depreciation against the US dollar.
According to reports by brokerage houses, following an interaction with the company, the IT major has been affected by the volatility in the forex market both in domestic segment as well as overseas.
Angel Broking in its report said, “TCS’ management indicated that during 2Q 2014 fiscal, the company is expected to incur forex losses to the tune of Rs 550-650 crore, largely on account of range forward options, assuming R/$ range of 65-68. It be noted that 50% of TCS’ hedges are in the form of options, a fair portion of which could be range forward options.”
A depreciating rupee is generally considered to be beneficial for the export focused IT industry, but they are also wary of the volatility in the currency movement.
According to a report by Nomura Securities, forex losses of TCS is likely to increase from R105 crore in the first quarter to R550-700 crore in the second quarter. The company is also likely to face a negative impact of 1-1.5% on dollar revenue due to cross-currency movement.
However, the depreciating rupee is also likely to aid TCS in expanding its operating margins. A report by Prabhudas Lilladher said, “The currency depreciation should give 250-300 basis points margin tailwind.”
The rupee depreciation also raises questions about IT companies passing these benefits to the customers like a price reduction or other incentives, but it is unlikely that TCS would be taking any such steps. Angel Broking said, “If the rupee remains at current levels, TCS will reinvest the benefits into the business over the medium term. The management indicated that it reinvested rupee gains in the business in the past as opposed to offering discounts/passing on rupee benefits to clients. Instead of passing the benefits to clients, the approach is more towards reinvesting in newer segments.”
Despite this expected loss on the forex front, TCS has projected a sustained momentum of growth from both US and Europe. The Prabhudas Lilladher report said, “Demand is predominantly from the existing customer on new technology and new IT spends. The projects are smaller in size, but clients are taking decision around the discretionary IT as well.”