Movement of rupee will directly help IT companies enjoy higher margins. Higher operating leveraged IT companies, mostly the mid-cap ones, will surely get benefited due to rupee depreciation.
Narnolia Financial Advisors
Depreciating rupee always helps exporting companies. But no such strong correlation existed during 2012-2017 as IT companies were grappling with industry-specific headwinds. BFSI in US and Europe, the largest contributor to IT companies were passing through a challenging times post 2008 crisis. And growing digitisation meant these Indian IT companies needed to reinvent the wheel both in terms of order acquisition as well as internal operations.
But 2018 surely looks a lot different — one BFSI segment order is inching up and Indian IT majors have learned successful execution in the digital era.
Since January 2018, the rupee depreciated by 11.5% and IT index rose by 35.5% year till date. Movement of rupee will directly help IT companies enjoy higher margins. Higher operating leveraged IT companies, mostly the mid-cap ones, will surely get benefited due to rupee depreciation.
For Q1FY19, rupee depreciated by 3% after 4.5% in Q4FY18. Though average EBITDA margin of large IT companies contracted by 30 bps from 23.6% to 23.3% as most of the gain due to rupee was offset by wage hikes and also as most of these companies follow hedging strategy which means the benefit will accrue after a lag of 2-3 quarters.
IT mid-cap companies EBITDA margin expanded by 80 bps from 16.3% to 17%. Most Management post results of Q1FY19 had maintained their earlier guidance of growth and EBITDA margins, though persistent fall in Rupee suggests that for the full year, margins will surely be higher.
During Q2, INR has already depreciated by further 3.5% that will ensure that management commentary post Q2 results in October would surely be positive on margin fronts. Revival in BFSI will ensure better commentary for growth as well.
Post Q1 results, Persistent, Mindtree and NIIT Tech expected improvement in their margins while Infy, TCS, HCL tech, Hexaware guided margins to remain stable and L&T Infotech, Tata Elxsi, and Zensar Tech expected some softness in margins going ahead.
Hexaware and L&T Infotech are fairly hedged and hence currency depreciation should not benefit them as much as it should benefit other IT companies. Tata Elxsi and Zensar will benefit out of rupee depreciation, however, management of these three companies have said that benefit will be offset by the wage hike that the company plans to undertake.Disclaimer: The author is Head of Research at Narnolia Financial Advisors. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.