Coronavirus fear: Biz disruption will outweigh currency gain, say analysts

As Indian rupee slides to a record low against the US dollar, this is unlikely to cheer the Indian software services providers owing to the novel coronavirus (COVID-19) outbreak.

Analysts tracking the sector said COVID-19 was not only expected to disrupt the core businesses of IT services firms but would also defer the new deal signings.

“There are a lot of worrying factors despite the currency losing value. Their workflow and demand are facing uncertainty due to COVID-19,” said Harit Shah, senior analyst at IndiaNivesh.

The fall in core business of IT firms is likely to bring down the dollar revenue of these companies, which will nullify the impact of rupee fall, said Madhu Babu, analyst at Centrum Broking. “There could also be curtailing of budgets from the clients’ side.”

This comes as Accenture announced its second-quarter results on Thursday. The global IT major slashed its revenue forecast in constant currency terms to 3-6 per cent year-on-year for the year-ending August 2020, from 6-8 per cent earlier, citing COVID-19 fears. Indian peers are likely to follow suit as India’s fourth-quarter earnings season kicks off from next month.

The rupee declined 0.3 per cent on Friday to hit an all-time low of Rs 75.20 against the dollar. “The fall is more likely to get extended in the financial year 2020-21 as the Reserve Bank is expected to cut rates,” said Naveen Kulkarni, chief investment officer, Axis Securities.

The central bank is likely to allow rupee depreciate over the next 12 months and not intervene “significantly” as the depreciation has also brought down the crude import bill and while exports could become more competitive, he said.

Usually, IT companies witness a change of 20-25 basis points in operating margin for every 1 per cent movement in the rupee, said Shah.

Infosys had given a margin guidance of 21-23 per cent for the ongoing financial year, while TCS expects this to be in the range of 26-28 per cent.

Typically, Indian IT services firms tend to pass on to the clients some of the benefits they derive from depreciating rupee. However, this time around, it is not going to be the case as the margins are already expected to be under tremendous pressure.

“Rupee has moved from Rs 40-levels to Rs 75 now per dollar over the last 12 years but margins of the sector have also fallen,” said Babu of Centrum Broking.