TCS, Infosys, HCL Tech and peers may not feel the tumbling US dollar yet — but the dent could be twice as bad going forward

TCS, Infosys, HCL Tech and peers may not feel the tumbling US dollar yet — but the dent could be twice as bad going forward
Indian IT companies could bear the brunt of the dollar hitting a two year lowBCCL/BI India
  • With the dollar’s sudden drop to a two-year low, Indian IT companies are looking to India’s apex bank to do what it does best — resist currency appreciation.
  • Meanwhile Goldman Sachs expects the dip in the dollar to get twice as bad in the coming days.
  • Forex advisory firm’s CEO and founder Abhishek Goenka told Business Insider that the cross currency benefits can still come in, but it depends on how the Reserve Bank of India (RBI) steps in.
Indian IT service companies like Tata Consultancy Services (TCS), HCL Technologies and Infosys can’t be pumped that the dollar hit a two-year low. Being exporters, when the dollar is high, it’s a boon but when it’s not, the tables can turn quickly. According to HDFC Securities, the dent is only going to get twice as bad going forward.

"The trade-weighted dollar has fallen 7% from its March peak, and Goldman Sachs expects the dollar slide to reach 15% from the highs," HDFC Securities said in a report dated September 2.

When the dollar moves 25 basis points, or a quarter of a percent, it could hurt these companies’ earnings per share anywhere between 1.9% and 2.3%, according to a Goldman Sachs report. The dollar exchange rate has fallen over 5% (about 500 basis points) since mid-April.

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TCS has the strongest immunity to fluctuations in dollar exchange rates because it has nearly $8 billion of its revenue hedged for such shocks.

CompanyEBIT margin sensitivity to 1% change in USD/INREarnings per share (EPS) FY21 expectation
TCS25-30 bps1.9%
Infosys25-30 bps1.9%
Wipro25-30 bps2.3%
HCL Tech20 bps2.1%
Tech Mahindra15-20 bps2%
Source: Goldman Sachs report dated August 28

The sudden drop hasn’t quite hit the companies just yet — and it could be held at bay, provided the dollar can recuperate. One way of making it happen is for the Reserve Bank of India (RBI) to keep buying up dollars.

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Analysts believe that the factors which caused the dollar to dip may not be long term. Provided things turn around within the next six to 12 months, the drop won’t matter. “Until then it should not be a problem as IT companies do typically hedge upto those tenors,” CEO and founder of forex advisory firm IFA Global, Abhishek Goenka, told Business Insider.

If the weak dollar is unable to climb back up, IT companies’ profit, revenue and other earnings in rupee terms will take a hit, according to him. “It will impact realisations,” he said.

The dollar dip may not be long term
Foreign exchange markets are ‘nowcasting’. Senior currency strategist at HSBC London, Dominic Bunning believes that many of the factors that currency being used to explain the dollar’s weakness are unlikely to “hold sway” in the coming months.

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Arguments for softness in the dollar due to cyclical elements doesn’t amount to a forecast for weakness and Bunning doesn’t see any signs of it in economic data. The uncertainty caused by COVID-19 leaves estimates and forecasts unreliable.

“The dollar might have been languishing for the past few months, but there is plenty of life in the old dog yet,” he wrote in the Financial Times on August 11.

RBI’s battle against inflation
How strong the rupee will be against the dollar is in the hands of the RBI — whether or not it continues with the hands-off approach from last week allowing the rupee to appreciate or goes back to buying up more dollars will determine cross-currency headwinds.

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“Though USD/INR is likely to follow the theme of broad USD weakness, RBI reaction function may cause the rupee to underperform,” said Goenka.

India’s banking regulator has been buying dollars to be the bucket load to ensure that the rupee’s value doesn’t slip below ₹74.50 per dollar in the last three months. However, last week, it let go of the reins and the rupee’s value appreciated to ₹ 73.50 per dollar.

However, further intervention by the RBI in the coming weeks could offset any appreciation that’s already occured.

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