Euro ash may cloud Indian IT vision

Sliding Currency, Economic Worries Threaten To Pull Down Recovering Sector

ECONOMIC uncertainty and a weakening currency in Europe are twin worries for India's exportfocused IT sector, which has only just recovered from the fallout of the US slowdown. The euro has slid to its lowest since the Lehman Brothers collapse and while the dollar has strengthened against the euro, it has not strengthened against the rupee to the same extent. 

    Europe is the second largest market for the Indian IT industry, accounting for approximately $15 billion worth of exports. For firms such as Tech Mahindra, WNS Global Services and Mastek, Europe is the largest market, bigger than even the US. Top IT firms Tata Consultancy Services, Infosys Technologies and Wipro earn between 20% and 25% of their revenues in euros and pounds. And Friday's euro crash, when the currency fell to a low of 1.24 against the dollar, sent jitters through the industry. Since the beginning of this year, the euro has lost around 13.5% against the dollar. 
    At stake is the fragile recovery of the outsourcing sector and exposure to euro and pound billings. "Nobody would have foreseen that the euro would fall to 1.23. Even the pound has not been doing very well," pointed out an IT analyst with an overseas brokerage. For most firms, approximately half their Europe region revenue is from the UK, where the billings are in pounds. Impact on sentiment a big worry 
    INFOSYS, for example, earns about 7% of revenue in euros and 12%-13% in pounds. Cross-currency hedges against the euro and GBP are also less common than rupee-dollar hedges, said analysts. Companies usually hedge only some part of their pound and euro exposure. In comparison, a higher percentage of dollar exposure is hedged. Many companies were not available to comment over the weekend but analysts that ET contacted said revenue realisation would be lower and the weak euro and pound would affect profitability. "Even the GBP (pound) has had a free fall in the last two days. There is much uncertainty but the pound has a higher resilience. We've hedged about 50% of our net exposure to the pound and to that extent, we are protected," said Farid Kazani, group CFO, Mastek. About 55% of Mastek's receivables are in pounds. 
    Among the large IT firms, HCL Technologies and Tech Mahindra have a higher percentage of revenues from the Europe region as compared to the rest of the industry. HCL Technologies, after the Axon acquisition, gets about 29% of its revenues from Europe, and Tech Mahindra, which has British Telecom as its largest client, gets 56% of its revenue from the Europe region. Ironically, IT firms may be insulated to some extent from euro worries because of their failure to make much headway into continental Europe as a market. But the bigger worry nagging companies at this point is how Europe's troubles will affect sentiment. "From an India perspective, business will not get impacted much. But the worry is the negative sentiment could affect larger markets such as the US. Customers who had started spending could put their capex plans on hold if it continues," warned Sudin Apte, principal analyst at technology research firm, Forrester. "I only hope the economic whirlwind doesn't impact buying sentiment" he added. 
    If the crisis spreads, CFOs who had resumed spending about 2-3 quarters ago might cut back on IT budgets and hold on to their capex plans. "Europe troubles will impact the Indian IT industry in two ways — one will be the cross-currency impact and the second will be that many corporates might cut back on budgets," added an equity analyst with a brokerage.

SPOILER ALERT: Trouble ahead