Weak rupee set to boost earnings margins for IT firms

The July-September quarter has always been considered financially good for Indian IT companies, and with a weak rupee further boosting exports this time around, sales and margins are likely to be more lucrative.

Tech bellwethers Infosys and Tata Consultancy Services (TCS) will kick-start the second quarter earnings season next week, with Bengaluru-based Infosys, already on a turnaround cusp, slated to announce its quarterly results on October 12, followed by larger rival TCS a day later.

“The September quarter will be strong for most Indian IT firms due to seasonal strength and favourable moves in key currencies (rupee, euro and pound against the dollar),” wrote Credit Suisse analysts Anantha Narayan and Nitin Jain. “We believe demand environment remains stable and this quarter’s underlying growth trends may reflect that.”

The rupee depreciated by 2.5% during the quarter, which is likely to boost firms’ operating profit margins by 60-80 basis points against the April-June quarter. Like all exporters, software companies benefit when the rupee falls.

“The core demand drivers of Indian IT like robust spending in the US, are holding on for now. The recent weakness in the rupee augurs well and would benefit margins and enable investments in digital,” said Kawaljeet Saluja of Kotak Institutional Equities.

TCS is expected to lag Infosys in revenue growth, given the slowdown in Latin America, Japan and its Diligenta insurance business in the UK, which remains a drag.

Wipro, India’s third-largest software services exporter, meanwhile, is likely to report a constant currency revenue growth of 2.4-2.8% in the quarter. It had a growth guidance of 1.5-3.5% for the second quarter.

HCL Tech, the fourth-largest IT company, has already said that its revenue growth in July-September will be impacted due to the depreciation of a basket of currencies against the US dollar.