Shorter furloughs, weak rupee to shield IT margins in Q3

Shorther furloughs than last year, when they were extended due to soft demand scenario, coupled with depreciating rupee, are expected to protect the margins of IT firms during the October-December period, which is otherwise seen as a weaker quarter.

“Last year furloughs were extended because on discretionary spends were weak leading to a soft demand scenario. However, IT firms are saying that this year the span is going to be normal. Further, rupee depreciation will act as a tailwinds to margins between 30-50 bps,” an analyst from a domestic broking firm said.

Furloughs, which are a recurring challenge during the October–December period, typically disrupt revenue for IT firms as clients pause projects temporarily. It occurs when clients suspend operations during periods such as Christmas and New Year, impacting domestic IT firms that continue to pay employee salaries despite not invoicing clients for the furlough period.

“Last year, we had an unprecedented level of furloughs. This year, furloughs are going to be back to regular levels. We definitely don’t anticipate the same level of furloughs as last year, so it will be positive for us,” LTIMindtree had told Fe in an earlier interaction, adding that the situation reflects improved planning and client stability.

Infosys had echoed similar sentiments. “We have baked in the regular furloughs (in the guidance) that we have seen over the past few years,” Jayesh Sanghrajka, chief financial officer had said after the company’s Q2 earnings.

Further, the depreciation of the rupee against the US dollar has emerged as a significant tailwind for IT companies as nearly 50-60% revenue of these companies come from the US.

Pareekh Jain, CEO of Pareekh Consulting and EIIRTrend said, “Furloughs are not going to get worse this year. The rupee depreciation will definitely help. For every one percent depreciation in the rupee, typically there’s a 0.5% increase in revenue and about a 1.5% increase in profit. This quarter should be better as the currency depreciation offsets furlough impacts”.

The rupee has declined nearly 92 paise against the US dollar so far in the Q3. It hit a fresh all-time low this week to 84.88.

Further, better macroeconomic conditions compared to last year are also contributing to a more favourable environment for IT firms. “The overall external environment is better now, which reduces the impact of furloughs. Additionally, if clients have pending budgets towards the end of the year, it often leads to additional spending in November and December,” Jain said.

Analysts also attributed the recent rise in IT stock prices to the falling rupee and intact bets on the Federal Reserve cutting interest rates later this month after an in line inflation data. The Nifty IT index on the National Stock Exchange recorded an all-time high this week, reflecting improved investor sentiment towards the sector.

Easing of discretionary spending pressure and better volumes in the banking financial services and insurance sector was also reflective with Infosys increasing its fiscal 2025 guidance to 3.75% to 4.5% from 3% to 4%.

“There are various factors that have led to a guidance change, starting from Q2 performance and increased volumes in financial services,” Infosys CFO Sanghrajka said. Industry observers, however, remain cautious as discretionary spending by clients is still not entirely out of the woods. Financial Express