Mumbai: As the euro weakens in the aftermath of the Greek debt crisis, and the pound slides as political uncertainty in the UK heightens, the fallout could eat into the revenues of India’s information technology (IT) industry that gets up to 30% of its export business from Europe.
Since the start of April, the euro has fallen by 5.15% against the rupee, and the British pound has slid 1.72%.
“At this point, the stronger rupee will likely have a cash flow impact on the remittances, but whether it would have an impact on the reported revenue would depend on how the currencies move during the rest of the quarter,” Som Mittal, president of industry body Nasscom, told Mint.
At this point, however, it is difficult to estimate the extent of the impact, he added.
Nasscom estimates Indian IT services and business process outsourcing (BPO) companies earned around 30% of their total export revenues of $50 billion (Rs2.26 trillion) in fiscal 2010 from Europe.
Graphic: Yogesh Kumar/Mint
“It is still early to say whether this would have a 50 basis points impact on the earnings or a 100 basis points impact,” said a Mumbai-based IT sector analyst with the equities research arm of a foreign investment advisory services firm, requesting not to be named. One basis point is one-hundredth of a percentage point.
Among tier-I Indian IT companies, Infosys Technologies Ltd earns 23% of its total revenue from Europe, while Tata Consultancy Services Ltd (TCS) and Wipro Ltd earn 25% and 26%, respectively, from there.
Smaller IT companies such as Tech Mahindra Ltd and Mastek Ltd, which have a higher exposure to Europe, will likely suffer more. Mastek gets around 54% of its total revenue from Europe while Tech Mahindra gets as much as 59% from that continent.
TCS and Infosys, India’s top two IT firms, respectively, declined comment as their chief financial officers were not available.
Rajendra Shreemal, vice-president and corporate treasurer at Wipro Technologies, the IT services division of India’s third biggest software exporter Wipro, said the company’s hedging policy has ensured it is adequately hedged for the short term.
“Hence, impact from a forex perspective would be minimal, although if the trend of (a) depreciating euro were to continue, it would have an impact in the medium term,” he said.
Although Greece has had a negative impact in the short term, the movement of the pound will be driven more by political developments and economic fundamentals in the medium term, Shreemal said.
Following an inconclusive general election in the UK, political parties there are currently trying to cobble together a coalition government.
A stable political formation in the UK can have a positive impact on the pound, Shreemal said, adding that Wipro will “wait and watch as to whether these concerns are short-lived or continue to persist in future”.
Ironically, help for Indian IT exports could come from ground zero of the anti-outsourcing movement: the US, whose currency has strengthened against the euro.
The dollar has gained around 0.84% against the rupee since the beginning of the quarter, which means revenue from the US—which accounts for around 62% of total software exports by Indian IT firms—will be higher because of the stronger currency rate.
“Given the higher exposure to the US, a stronger dollar could easily offset the negative fallout from weakening euro and pound,” the IT analyst quoted earlier said.
What’s more, currency experts expect the rupee to continue to weaken against the dollar and gain against the pound and euro.
“As investors move to safer currencies such as the US dollar and Japanese yen, the rupee could get severely mauled,” cautioned Satyajit Kanjilal, chief executive officer of Forexserve, a Mumbai-based foreign exchange risk management advisory. “However, the rupee will grow stronger against euro and pound given the problems that the European nations are facing.”
Ravi Krishnan contributed to this story