Dollar impact: Wipro, Persistent and Mphasis may hit hard in near-term, warns Kotak

A weak dollar is all likely to impact the profitability of IT firms such as Wipro, Persistent Systems and Mphasis hard in the near-term, Kotak Institutional Equities said based on currency movements on an unhedged basis. 

The warning comes as the dollar depreciated 4 per cent against the rupee in the past three months. The greenback has also dropped 7.6 per cent against euro and 9.9 per cent against British pound. This sharp INR appreciation can negatively impact profitability. 

Kotak said a company with lower margins may take bigger hit on earnings per share due to the rupee appreciation. The logic is: 1 per cent rupee appreciation impacts margins by 30 bps. A 30 bps impact on a 21 per cent margin of Infosys is lower compared with a 30 bps hit on mid-tier companies with margins of 12-14 per cent.

Therefore, Kotak said companies with a higher offshore mix may take higher hit on profitability. 

It explained that a rupee appreciation does not change the onsite margin, but it impacts offshore margins, adding that typical offshore margins are generally three times onsite margins. 

In its coverage universe, Kotak sees a up to 8 per cent hit on FY26 earnings for companies such as Persistent Systems (7.9 per cent), Indegene (6.7 per cent) and Mphasis (6.1 per cent) due to their higher US exposure. 

"In the near term, the impact will be largely similar at 1-7 per cent. We have not assumed any pullback in variable compensation payouts or cost reductions in our analysis, although companies may use these measures in the short term to defend margins," it said.

Kotak believes a few IT companies such LTIMindtree, Tech Mahindra and L&T Technology Services, have long-duration structured hedging policies that will insulate them at the net profit level, essentially offsetting the impact of the currency appreciation at the EBIT line, with forex gains captured in other income.