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Currency swings the other way

Indian IT Services sector has enjoyed favorable YoY cross currency tailwinds through the past 15 months however if the current exchange rates were to sustain, Dec’21 quarter will be the 1st quarter wherein the companies may see some YoY currency headwinds on reported USD growth and margins. We note that this headwind is not very material for now with underlying commentary from global peers as well as offshore techs being very confident on spending strength sustaining through the medium term and the ability to pass on the increasing talent cost pressures back to clients through pricing leverage. INFO, HCLT and TECHM are our BUY rated stocks amongst Tier I techs. Amongst Tier II techs, we retain faith in PSYS and MPHL

* Indian techs have enjoyed 100-400 bps YoY cross currency tailwinds on reported USD revenue growth through the past few quarters: Indian Tier I techs have enjoyed ~100-400 bps YoY cross currency tailwinds since 1QFY21 (refer Exhibit 1) which has aided reported USD revenue growth for the companies. GBP and Euro have both depreciated V/s the USD in recent weeks and if the current exchange rates were to hold, Indian techs will see negative impact of cross currency moves on reported USD growth for the 1st time in Dec’21 quarter. That said, we note that the underlying commentary from both Indian techs and global peers in recent times has been very comforting and confident of growth momentum sustaining through the next few quarters.

* Some currency headwinds on margins as well!: The recent currency moves may also pose slight headwinds on margins as well given that GBP and Euro have depreciated V/s the INR. Indian techs have continued to do well on margins in recent times, negating concerns in larger sections on the street of increasing supply side pressures. We note that global peers continue to suggest ability to defend margins through growth and pricing leverage (with some players suggesting mid- year price increases during 2021 and higher than normal price increases for CY22).

* Underlying demand momentum remains strong although currency may pose some risks on reported growth and margins: Our industry checks and read through from global peers commentary continues to suggest sustenance of the demand momentum through the next few quarters with some global peers suggesting of higher than trend line growth through CY22/FY23 as well. Further the global peers remain confident of defending margins despite the increasing talent cost pressures aided by growth and pricing leverage (some players have spoken of mid-year rate increases in CY21/FY22 and suggest ‘higher than normal’ price increases for CY22/FY23). We continue to see the offshore techs enjoying a ‘2004-07’ phase wherein despite supply side pressures, they were able to negate the margin pressures. INFO, HCLT and TECHM are our BUY rated stocks amongst Tier I techs. PSYS and MPHL are our BUY’s in the Tier II coverage.

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