Why IT firms should treat HCL's Q3 results as an alarm bell

Indian IT services companies might take 110-220 basis point hit on margins on cross-currency headwinds, analysts estimate.

HCL Technology’s pre-earnings alert about the impact of currency movements on its financial performance of October-December 2014 (third quarter) might well indicate the story of the earnings of most Indian information technology (IT) services companies during the quarter.

According to analysts, Indian IT services companies could take an around 110-220 basis point hit on their margins during Q3, depending on their exposure to different regions.

Among the tier-I players, experts see Infosys being the least hit due to the severe cross-currency movement during Q3, followed by Tata Consultancy Services (TCS) and Wipro. HCL Technologies is expected to be worst hit in the tier-I lot.

“Q3 is anyway a seasonally weak period for Indian IT services players, and the cross-currency headwinds just spoiled the party further," said an Mumbai-based analyst.

"The impact will be seen across the board, but it will depend on the currency exposure that each company has."

Indian IT services companies get around 70 per cent of their revenues from the US, and another 15 per cent from the UK.

In a statement filed on the stock exchanges on Wednesday, HCL Technologies said its revenue for Q3 may take a hit due to strengthening of US dollar against various global currencies.

"During this quarter, US Dollar continued to strengthen against almost all global currencies like British Pound, Euro, Australian Dollar and so on.

Since the company’s revenues are derived in multiple currencies, the revenues for the quarter to be reported in US Dollar would have adverse impact of around 210 basis points on account of strengthening of US Dollar against various global currencies," HCL Technologies said in its "pre-quarter earnings briefing note for investors".

Reacting to HCL Technologies' announcement, share of the company ended down over three percent on BSE on Tuesday. At 12.30 IST on Wednesday, the company's shares were trading nearly flat at Rs 1,541.11 apiece.

For the July-September quarter (Q2), HCL Technologies had posted 1.9 per cent quarter-on-quarter growth in dollar-terms after taking into account the adverse impact of 130 basis points on account of movement in various currencies.

At the beginning of the ongoing quarter, HCL Technologies had estimated foreign exchange loss of $2.5 million on account of cash flow hedges based on exchange rates prevailing as on September 2014-end.

“However taking into account the exchange rate as on December 18, 2014, the company now expects to post foreign exchange gain of about $2 million, covering the impact of both cash flow hedges and mark-to-market of the foreign currency assets and liabilities."

This foreign exchange gain or loss would continue to be reported after EBIT,” the company said.