Rising rupee may hit IT hikes

This is a very good article published today in The Economic Times on the impact of rupee appreciation, which may become a permanent macro economic phenonmenon, on the pay hikes as well as on recruitment in Information Technology sector, which bore the brunt of rupee appreciation effecting the margins of IT companies. As already told, every 1 percent appreciation in rupee against US dollar, the margins of export oriented IT companies are effected to the extent of 35-50 basis points or 0.35 to 0.50 percent.

Is the IT party over? For the moment, it looks so. With the strong rupee impacting adversely the profits of every IT company, salary increments are expected to take a hit. And more of the salary is likely now to become part of the variable component, so that you get more only if you work more and perform better. “There is tremendous pressure to keep costs down,” says Venkat Shastry, partner in executive search firm Stanton Chase International.

“Over the next few quarters, I don’t see anybody providing for any serious salary increases or making corrections, even if that means higher attrition. It’s been madness in 3 to 10 years’ experience category in the past few years. That will taper down.”

Salary cost is by far the biggest component of cost, accounting for 45% of IT companies ’ costs and 40% of BPO costs. With many mid-size and small IT/BPO firms seeing a fall in profits in the Q1 of this fiscal, and most larger ones witnessing a sharp slowdown, varied options are being considered to keep the salary component under check or to get more work out of each employee. The pressure to do this is more so as Indian IT’s competitors like IBM, Accenture and EDS have not been impacted by rupee rise as much, given that they have only a fifth or less of their workforce in India. Says Gangapriya Chakraverti of Mercer India, “Variable pay will come up in a big way. Compensation related to productivity and contribution will take over. Companies will have to be careful about headcount. They will no longer have the luxury of maintaining a large talent pool that’s sitting idle.” Such pools are maintained to provide for attrition or to use in the event of the firm suddenly bagging a big project.

Adds Gautam Sinha, CEO of TVA Infotech, “The mid quartile which has been getting close to 15-20 % increments in compensation packages, will see tightening. Companies might not decrease the percentage of increment; instead they might link it to productivity and performance and downsize number of people being awarded raises. This is because companies are getting work and signing new deals. So they need the workforce to deliver the job. But they can afford to be choosy about who they want to appraise.”

Rupee’s rise is expected to hit BPO employees harder than IT. Unlike infotech, where 30% to 50% of employees work onsite and paid in dollars, in BPOs, 90% of the work is done in India and employees are paid in rupees. “Mid and senior level executives in BPOs have been getting increments of 14-20 %. I think that will come down to 8-15 %. Overall weighted average of increments used to be 7-8 %. That may be down to 4-5 %,” Vashistha says.

The Source : The Economic Times - July 23, 2007

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).

1. Dreaming With BRICs: The Path to 2050 - October 01, 2003
2. How Solid are the BRICs? - December 01, 2005
3. India’s Rising Growth Potential - January 22, 2007
4. The BRICs Dream: Web Tour

Related Articles:-

• Strong rupee hits Infy’s topline - The Economic Times - July 15, 2007
• Rupee appreciation drags down Infosys’ Q1 profitability - Navhind Times - July 12, 2007
• Infosys CFO explains the firm's currency challenge - Marketwatch - July 11, 2007
• Infosys Q1 net up 35 pct, rupee worry hits shares - Reuters India - July 11, 2007
• India's handling of rupee remains a riddle - Rediff News - July 14, 2007
• Govt eases pain of exporters hit by rupee rise - Reuters India - July 12, 2007
• A disappointing Q1 seen for tech cos - Business Line - July 06, 2007
• Re appreciation to dent ITfirms'Q1 result - Moneycontrol.com - July 06, 2007
• Rising rupee and IT stocks — Smart strategies can minimise the risk - Business Line - July 01, 2007
• Re appreciation could hit IT sector EBITDA by 40-60bps - Indiaearnings.com - March 31, 2007

IT companies to go non-linear manpower-revenue growth

In a significant shift from traditional business model, IT companies, both big and small, are looking at de-linking manpower growth from revenue growth. Companies are targeting higher revenue per employee rather than simply adding more manpower with the same productivity. This process results in more innovation, higher productivity and better use of resources in the medium term. It may not reduce the employee intake in near term but it has overall effect of reducing the new employment opportunities in the IT sector in the medium to long term.

The $4.3 billion TCS, with a head count of 89,419, does not intend to become, say, a 5,00,000 people company. Even Infosys is looking at business models that bring in higher per capita revenue and de-link revenue from manpower growth. This is more important as these companies earn substantial revenue in dollars and there is a likelyhood of appreciation of Rupee against Dollar in the medium to long term, bringing pressure on the gross margins.

At present, the revenue per employee in the domestic industry is much lower than what global players are able to extract: it ranges from Rs. 25 lakh to Rs. 40 lakh. On the other hand, for global companies, the revenue ranges from Rs. 70 lakh to Rs. 130 lakh.

To change the linear relationship betweeen manpower and revenue, the companies have to move up in the value chain. In TCS, for instance, till a few years ago, almost 90% of the the revenues came from the application space. This has now come down to 50-55% as the company has scaled up new service lines and provides end-to-end solutions to the clients. High growth services like infrastructure management, consulting and BPO now account for 18% of TCS revenues comapred to 10% in 2005-06.

Some of the small and medium sized companies aiming at reducing manpower dependence by using productivity tools and automation. Pune-based Zensar Technologies has built a model known as "solution blueprint" (SBP) to reduce dependence on manpower and scale down maintainance costs. SBP is a collection of work flows, design models and protocols that allows automation of the software engineering process.

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SBP Based Application - Deliverables