Cognizant Seen Benefiting From Hedge Strategy as Rupee Gains

Cognizant Technology Solutions Corp., which pays more than a quarter of its costs in Indian rupees, stands to benefit from maintaining a hedge that bets on the currency’s rise.

The rupee is forecast to strengthen about 5.7 percent against the U.S. dollar by the end of 2014, according to data compiled by Bloomberg. That would mean gains for Cognizant, a provider of consulting and outsourcing, which has a forward settlement contract bet on the currency.

Cognizant, which employs about 75 percent of its workforce in India, is keeping the strategy even after it led to a loss on the hedge last quarter as the rupee dropped, President Gordon Coburn said. The current hedge has been in place for four years. The approach allows the Teaneck, New Jersey-based company to mitigate risk, he said.

“It’s doing what it’s supposed to do, reducing the volatility,” Coburn said in an interview last week, after the company reported second-quarter earnings.

While Cognizant’s second-quarter results topped estimates, they included a 7-cent nonoperating loss as the rupee weakened against the dollar. The Indian currency has dropped more than 10 percent this year, according to data compiled by Bloomberg.

“The rupee devalued very significantly, so our hedges ended up underwater,” Coburn said. “In this case, unfortunately, it’s taking away the upside. If it went the other way, we’d be looking smart.”

Cognizant’s treasury department is a risk-mitigation unit dedicated to reducing volatility, not a profit center, he said.

Operational Stability

While the bet didn’t work last quarter, the rupee’s decline cut costs because the company pays workers in that currency, said James Friedman, an analyst at Susquehanna International Group in New York.

If the rupee had gained ground against the greenback, the winning bet would have offset rising costs, said Friedman, who has a positive rating on Cognizant’s shares.

Hedging “is the conservative way to deliver stable operations over time,” he said.

Cognizant, which employs 164,300 globally, had total operating costs of $1.7 billion for the period ended June 30, the company said. Rupee-related expenses accounted for 29 percent of that amount.

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