Currency volatility to hit earnings of IT firms

NEW DELHI : While rising costs and high attrition have continued to remain key challenges for IT services companies, the slide in some major global currencies is eroding the benefits of a strong dollar, adding to outlook concerns for Q2FY23, said analysts.

“We forecast a solid 2.5-4.7% sequential revenue growth for large players for the September 2022 quarter,” said analysts at Kotak Institutional Equities. “The EBIT (earnings before interest and taxes) margin should remain under pressure as companies deal with supply-side challenges and elevated costs.”

The BSE information and technology index has declined by almost 27.3% from the highs in January, reflecting investors’ concerns on the IT services sector. The S&P BSE Sensex is also down, albeit lower by around 5.3%.

Analysts at Motilal Oswal Financial Services Ltd (MOFSL) pegged 4.2% sequential growth in constant currency terms for companies under their coverage universe. Growth in EBIT (5.9% sequentially) should be aided by seasonal margin improvement, although the impact may be muted due to continued supply side pressure, they added.

Global currency volatility will be among other key factors impacting profitability. While firms will benefit from a stronger dollar, a weakening euro, pound sterling (GBP), yen and Australian dollar (AUD) is likely to take away the benefits.

“We expect cross-currency headwinds of 120-200 basis points in Q2FY23 led by depreciation of GBP, Euro and AUD by 6.2%, 5.4% and 4% against the US dollar, respectively,” said analysts at ICICI Securities Ltd. The rupee has depreciated 3.2% against the dollar in Q2FY23 and appreciated by 2.2-3% against other currencies (GBP, Euro etc.) leading to partly offsetting margin pressures, they added.

Analysts at HDFC Securities said that with a nearly 10% drop in GBP and Euro since the last quarter, aggravated by the yen and AUD, the volatility in currency will adversely impact Q2 performance as well as in Q3.

With a turbulent macro environment and looming fears, all eyes will remain on the TCV (total contract value) deal wins, and management commentaries for cues on the impact of the slowdown in the US and other developed markets. Management commentaries on hiring and attrition, and pricing and revenues from core verticals will also be carefully watched.

Analysts at MOFSL said: “We believe Infosys and HCL Technologies will retain revenue growth guidance.”

However, MOFSL expects a slowdown in growth rates with amplified weakness in 2HFY23 and some stocks are already baking in a material slowdown in growth rates. Hiring, too, is likely to slow, though attrition rates are expected to have peaked.

“We expect a shift in the management tone from ‘continued strength in demand’ to focus on ‘RoI (return on investment) and cost optimisation by clients’, resulting in normalisation of demand,” said ICICI Securities analysts.

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