Tech Sector Alert: Kotak Warns Dollar Weakness Could Hit Wipro, Persistent, and Mphasis Hard in FY26

The recent plunge of the US dollar is creating significant hurdles for Indian IT firms, particularly those heavily reliant on revenue denominated in USD. Over the past three months, the dollar has depreciated around 4% against the Indian Rupee (INR), and even more dramatically against the Euro (7.6%) and the British Pound (9.9%). This shift in currency dynamics could lead to reduced profitability, especially for mid-tier companies that have considerable offshore operations but limited currency hedging strategies.

Currency Fluctuations Impacting Indian IT Earnings

The Indian IT sector is currently navigating a landscape marked by cost-sensitive demand, and the rising value of the INR might further strain earnings as we approach FY26. Notably, firms like Persistent, Mphasis, and Wipro are projected to encounter the most significant risks, particularly those with lower profitability levels.

Recent INR Performance: Over the last three months, the INR appreciated by 3.5% against the USD. On May 7, the INR experienced a 1.5% drop against the dollar, and the following day saw a decline of Rs 1.30 in a single session—marking its steepest drop in a month.

Mitigating Factors in Currency Depreciation

As the USD weakens against numerous currencies, including the Euro, British Pound, Australian Dollar, and Japanese Yen, this depreciation may mitigate some adverse effects of the INR’s strength. According to Kotak Institutional Equities, larger IT firms are less exposed to the dollar, which means the quarter-over-quarter impact will be modest. In contrast, mid-tier companies with significant USD revenue exposure are likely to feel the heat more acutely.

Long-term Hedging Strategies: Companies such as LTIM, Tech Mahindra, and LTTS have structured hedging policies that can buffer their net profit against currency fluctuations. Such strategies are designed to offset the consequences of currency appreciation on their earnings before interest and tax (EBIT).

Projected Earnings Impact for FY26

Kotak’s analysis anticipates a 2-8% reduction in FY2026 earnings across various firms, with particularly high impacts expected for Persistent (7.9%), Indegene (6.7%), and Mphasis (6.1%). In the near term, the anticipated impact could hover around 1-7%.

Earnings Impact Breakdown:
- Companies with a High Offshore Mix: Higher offshore operations typically mean greater exposure to currency fluctuations.
- Lower Margin Concerns: Firms with narrower profit margins will experience a more significant hit to earnings per share (EPS) because even a minor appreciation in the INR can substantially affect their margins.
- Hedging Practices: Companies like LTIM and LTTS hedge nearly 90% of their cash flows for the next year, shielding them from immediate currency impacts.

Long-term Implications of Sustained USD Weakness

In a cost-optimized demand environment, companies are increasingly seeking larger, long-term contracts. These projects are often bid with specific currency expectations, and a sustained depreciation of the USD could undermine the profitability of these engagements. The ongoing competition for contracts means that companies may have limited options to safeguard their margins.

In summary, as the situation evolves with the USD’s depreciation and the INR’s appreciation, Indian IT firms must navigate these challenges carefully to maintain profitability and competitive advantage in the global market.