InvestorQ : What is this cross currency losses that we hear about the IT companies in India and how would it impact the IT companies?
Moii Chavate made post

What is this cross currency losses that we hear about the IT companies in India and how would it impact the IT companies?

Tisha Malhotra answered.
1 month ago

As if the problems for the Indian IT industry are not enough, they are up against a new problem. Yes it is not about attrition or moonlighting. It is about cross currency headwinds. Last few quarters have been full of challenges. Attrition was up sharply, so recruiting and training freshers became a big task. In addition, manpower costs surged as IT companies fell over one another to attract the best of talent. Both eroded operating margins but now both have become relatively subdued. The problem of cross currency comes from the IT companies earning a lot of their revenues in non-dollar currencies like GBP, Euro, AUD etc.

We all thought that dollar is strengthening like crazy, so IT companies should be awfully happy. That is not the case, The currencies of other countries are weakening against the dollar index and that is impacting the revenues that Indian IT is earning from euros, pounds and Australian dollars or even Yen. These four countries give about 25-30% of revenues and they have fallen sharply against the dollar. That is the problem. This has offset the gains of dollar rupee in a big way. Here is how the equation works in practice.

It must be remembered that Indian IT companies today are not entirely US dependent like the old days. Today, for most large IT companies key markets include the UK, EU, Japan and Australia; apart from India and other emerging markets. As a result, Indian IT companies not only get payments in dollars but also in Pounds, Yen, Australian Dollars and Euros. Since these European and Asian currencies are also aggressively losing value against the dollar, the gains from a strong dollar is offset by losses on Pound and Euro earnings. That is the crux of the cross currency risk for IT companies in the September 2022 quarter.

It is hardly surprising that most brokers stayed cautious on IT sector. Research analysts are betting on the top line revenues growing between 3% to 4% sequentially in dollar terms, but there is almost a consensus that the EBITDA margins will face cost pressures. However, attrition risk may be lower in this quarter. The cross currency headwinds are likely to reduce the operating profit margins of these IT companies by 150 to 200 basis points. In short, IT companies need to handle multiple risks like attrition, moonlighting and to that list one can also add cross currency headwinds. Surely a challenging quarter for Indian IT stocks.