/* Google verification tag */ Indian School of Business: Rising rupee will continue to hit the bottomlines of I.T. companies
Indian School of Business

Rising rupee will continue to hit the bottomlines of I.T. companies

A strong rupee is likely to lop Rs 1,000 cr off blue-chip IT company Infosys Technologies’ topline in FY08. Though Infosys witnessed a healthy 7.5% sequential growth in top line in dollar terms , the hardening rupee took the sheen off its performance. Infosys reported a 5.7%sequential decline in consolidated net profit, which stood at Rs 1,079 crore in the first quarter (Q1) ended June 30, 2007, against Rs 1,144 crore in the fourth quarter (Q4) ended March 31, 2007. The appreciating rupee has taken away Rs 287 crore in Q1 from Infosys, besides enquring that it misses its quarterly guidance for the second time running. “Infosys will have to maintage the appreciating rupee with higher volume growth,” said CEO & MD Kris Gopalakrishnan.

So is it the end of the euphoric times that the Indian IT sector has been getting used to — and all because of the relentless appreciation of the rupee against major currencies. The answer seems to be yes, given the fact that the Indian IT sector earns four out of every five rupees from overseas clients and that most IT exporters’ margins are being squeezed on account of stronger home currency. However, the picture is not all that sombre as there are still some sons of the soil, that have significant India operations in the highly export-oriented IT industry. ETIG has taken a closer look at some of the companies that generate sizeable revenue by serving the domestic market. These companies run operations in India profitably. They are shielded from the currency fluctuations to a great extent as only a small portion of their income is earned in foreign currency. Tulip IT Services, CMC, NIIT and Spanco are among them. While Tulip earns all of its revenue domestically, the others generate more than three-fourth of their total income from India. Larger firms like Ramco Systems and Rolta India have about two-third of revenue coming from the domestic clients. IT companies in India have traditionally looked westward for business. This was probably because the domestic market appears to be a tiny dot compared to the larger opportunities globally. Nasscom estimates the global IT market for Indian IT companies to be $45 billion.

There is something puzzling about how the government appears to be thinking about policies relating to capital inflows and the rupee. On the one hand, it is going all out to attract more foreign capital inflows and is also encouraging overseas borrowing by Indian companies. On the other hand, it now appears undecided about whether or not to allow further significant appreciation of the rupee against the dollar, a highly likely outcome if net capital inflows continue to surge. The rupee has gained more than 9 percent against the dollar since the start of the year, and touched a nine-year high of 40.28 rupees per dollar in late May. Its surge triggered complaints from small and medium-sized exporters, which account for 45 percent of the country's exports.

It is hard to fathom that April's uncharacteristically huge appreciation of the rupee against the dollar was solely the RBI's decision. It is equally hard to imagine that the central bank's return to intervention in the foreign exchange market in recent weeks is without the government's sign-off, or perhaps the intervention is at the government's suggestion.

Ambit Capital has come out with report on rupee appreciation impact on IT sector. They say every one percent Rupee appreciation could hit IT sector EBITDA margins by 40-60bps or 0.4 - 0.6%.

At the end, we have to realise that the rupee appreciation is going to stay. Many analysts say that the Rupee could appreciate upto a lvel of Rs. 35-37 per one Dollar by the end of 2007. Of course, if the government does not take any measures to reduce FII inflows, the above scenario may become a reality. As Infosys chairman and chief mentor N.R. Narayna Murthy has said, the rupee appreciation was a macro economic issue and called upon corporates to become more efficient, productive and reduce costs in operations. This meant that the revenue generated per employee in I.T. sector would have to be improved. Is this an indication of lower level of growth in employment in IT sector or lower wage increase in the IT sector?

In this respect, I would request the viewers to read the reports of Goldman Sachs, an international consulting firm, on emerging economic super powers of tomorrow - BRICs (Brazil, Russia, India, and China).

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at 7/15/2007 09:05:00 AM

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