The effects of appreciating Indian Rupee in Q1 - A snapshot

The Indian Rupee appreciating against all major currencies including US Dollar. It has appreciated from a low of Rs. 45-46 a Dollar to almost Rs. 40-41 a dollar at present, an almost 11-12% appreciation. This appreciation has effected all industries, but the brunt is borne by I.T. Sector, Textile sector and leather industry.

Information Technology Sector

India's software exporters, like Infosys, TCS, Hexaware, derive much of their income in foreign currencies and see such a rise eroding rupee earnings. A majority of these firms provide services, primarily to the US followed by Europe and the rest of the world. But the rupee has appreciated across all major currencies during the quarter – 7.1 per cent against the US dollar, 4.8 per cent against the euro, and 5.8 per cent against the pound. It is estimated that each 1 percent rise in rupee against dollar effects the margin by 35-50 basis points or 0.35 to 0.5% of software companies whose major revenue is derived from software exports. Most of the software service oriented companies reported a 10-30 per cent dip in their net profit compared with the trailing quarter’s net profit figure. While a big IT major such as Tata Consultancy Services (TCS) could offset the rupee appreciation to some extent due to its hedging, the smaller players have not been as lucky. They have just about started to hedge against the rupee appreciation.

• The 7% rupee appreciation against the US dollar during the first quarter ended June 30, 2007 took its toll on the revenues and margins of Infosys Technologies, India's second largest software exporter. “For the first time in as many years, an appreciating rupee had a 3.5% direct fallout on our operating margins. While a 13-15% increase in offshore wages and 5-6% hike in onsite salaries had an impact of 2.5%, higher visa costs contributed another 1% to the overall operational impact,” Infosys CFO V Balakrishnan said. He said Infosys was successful in neutralising the negative impact of a strong rupee by hedging against the US dollar (1.5%), increasing the utilisation rate (3%) and securing better pricing (1%) to the extent of 4%. "As a result, the impact was brought down to 3% on the operating margin. We had hedged $925 million to take forward cover at the conversion rate of Rs 40.58 per US dollar. We will increase the forward cover, if required, by hedging more. The rupee had also appreciated against euro by 4.9%, pound by 5.5% and other currencies during the quarter,” Balakrishnan pointed out.
• Tata Consultancy Services, India's largest IT services exporter, posted solid revenue and profit growth in its first fiscal quarter despite the appreciation of the rupee and escalating wage costs. TCS said its use of a hedging policy to mitigate the fluctuations in the various currencies in which it bills is paying off, and it closed the quarter with $2.5bn in outstanding hedges. Another way in which the company is attempting to offset pressure on its margins is by increasing the prices it charges to existing clients when current deals come up for renewal. During the first quarter, pricing rose 0.6%, and said it was looking at a raise of between 3% to 5% on forthcoming renewals.
• Indian software firm Hexaware Technologies Ltd. operating profit margins fell 2.8 percentage points in April-June quarter, primarily due to a rise in rupee's external value.
• Software services firm Aztecsoft, which posted a near 63 per cent decline in profit for the first quarter ended June 30, said the sharp rupee appreciation had impacted its performance. "Rupee appreciation was the fundamental reason. However, our tight control on operation and hedging has enabled us to reduce the impact," Aztecsoft Managing Director V Sunderajan said. "The revenues were impacted by 6.8 per cent on account of unanticipated exchange rate variation. However, tight control over operations, better utilisation and favourable hedging ensured that the bottomline impact was limited to 1.2 per cent of revenues," the company said.
• KPIT Cummins' profit as compared to the preceding quarter declined by 9.77 per cent due to the rupee appreciation and salary increments, a company statement said. The rupee appreciation has forced the company to revise its PAT guidance for FY08 downwards from around Rs 70 crore to around Rs 63-68 crore.

STRATEGY

To offset the rupee appreciation, the companies have managed to effect a hike in the billing rates by 3-8 per cent. They have also improved their employee utilisation rates, managed wage cost by hiring more freshers and are moving to other geographies, where the currency impact is lower. The traditional levers of utilisation, onsite-offshore mix, employee rotation and scale efficiencies should kick in, but with a lag, said ABN-Amro analysts. The key differentiator, they added, should be how quickly the companies manage costs.

Related Articles:-

• Small IT firms bear the rupee brunt - Business Standard - July 19, 2007
• Side effects of the rise in Rupee - Cybernoon.com - July 18, 2007
• Re virus hits Infy Q1 - Business Standard- July 12, 2007

Manufacturing Sector

• Textile exports declined by 6% in the April-June period of this fiscal because of an all-time rupee appreciation of 14%.
• CII said its survey of textiles and apparel export companies in the last financial year revealed that there has been a decline in total revenue, operating income and profit margin to the tune of 7.9 per cent, 8.9 per cent and 7.9 per cent respectively. Further, there could be an erosion of profit margins to the extent of 10.4 percent during the next six months only on account of a stronger rupee,” it said. “If we add the impact of rise in interest rates on the profit margins, it is a further decline of another 1.5 percent,” it said.
• Small- and medium-sized, export-oriented pharmaceutical companies are expecting a 5-10 per cent decline in their bottom line for the April-June period, owing to the rupee appreciation. The impact will be minimal on the larger companies such as Ranbaxy, Sun and Wockhardt, as they are fully hedged against the net exposure of the rupee in the international markets. “The effect of rupee appreciation will be severe on companies, which are primarily export-oriented. Any pharma or contract manufacturing firm, whose 60-70 per cent revenues come from foreign markets, will find its bottom line affected by around 10-12 per cent. The companies are unable to compensate for the losses due to the long-term contracts,” Venkat Jasti, managing director, Suven Life Sciences, said. Suven, a major Contract Research and Manufacturing Services (CRAMS) player, has most of its revenues from foreign contracts. However, major players are unfazed. “We have 10 production facilities outside the country that serve as automatic hedging towards rupee-dollar transactions,” a Ranbaxy spokesman said.
• The National Manufacturing Competitive Council (NMCC) has expressed concerns over the impact of appreciating rupee on the manufacturing sector, especially small and medium enterprises (SMEs).

Related Articles:-

• Rising rupee squeezing textiles, leather exports - Hindustan Times - July 19, 2007
• Textiles hoping to perk up exports with package - Financial Express - July 18, 2007
• CII warns of loan defaults in textiles, leather - Hindustan Times - July 16, 2007
• Re rise may not hit pharma companies - Business Standard - July 16, 2007
• Rupee appreciation hurting the SME segment in manufacturing - domain-b.com - June 21, 2007