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Tata Consultancy, Infosys set to gain from wilting Indian rupee

The slump in the currency to boost export earnings of software firms

Top Indian outsourcing companies such as Tata Consultancy Services that doeson’t have meaningful cash flow hedges are likely to benefit immediately from the rupee depreciation.   © AP

MUMBAI (NewsRise) -- The Indian rupee's slide against the U.S. dollar since the beginning of the year may provide a boost to India's software exporters such as Tata Consultancy Services and Infosys after a bleak period of growth slowdown.

The rupee has lost as much as 14% since January, hurt by rising crude oil price and a sell-off in emerging markets, turning the currency into Asia's worst-performing currency. It touched a record low of 72.92 rupees to a dollar on Wednesday, before rebounding on Friday, amid hopes of government intervention through fiscal and monetary steps.

The slump in the rupee has prompted many analysts to upgrade their earnings estimates for the sector, even as they expect the impact to vary across companies based on their hedging strategies.

Kotak Institutional Equities revised its earnings targets for fiscal years 2019 through 2021 by up to 7%. It assumes the value of rupee to be between 70 and 72, compared with its previous assumption of 68.50 and 70.

According to the brokerage, top Indian outsourcing companies such as Tata Consultancy and Infosys that don't have meaningful cash flow hedges are likely to benefit immediately from the rupee depreciation. However, for third-largest Wipro, with massive currency hedges, the gains may be limited.

For top Indian outsourcing companies, a 1% fall in the value of rupee against the dollar is likely to lead to a 1% to 1.5% improvement in earnings.

According to Kotak, Infosys' cash flow hedges are a "miniscule" $300 million. While TCS hedges a large chunk of its cash flows, it does it through options, which means the software exporter is most likely to realize the benefit of the weaker rupee.

The currency gains are a boon to India's software exporters that have been reluctant to make investments in the face of slowing revenue growth in the last few years. The industry is struggling to accelerate the pace of adoption of new internet-based software which requires massive investments. It continues to rely heavily on stock IT services such as application development and business process outsourcing to drive growth.

India's main software trade body, the National Association of Software Services Companies, expects the country's software exports to grow 7% to 9% this fiscal year, a far cry from the double-digit growth in the heady days of last decade.

UBS expects Infosys, along with Tata Consultancy, to use the gains in currency depreciation to accelerate investments.

Infosys and TCS stand out from their competitors in terms of the willingness to invest more in client-facing activities and employee reskilling, UBS said in a note last week. "We view (this) positively when compared to companies that are trying to improve or retain operating margins in fiscal year 2020."

Shares of Tata Consultancy gained 1%, while that of Infosys lost 1% in Mumbai trading on Friday. Wipro shares gained 0.5%, while the benchmark S&P BSE Sensex closed 1% up.

--Dhanya Ann Thoppil

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