Though the rupee is touching a new low almost every passing day, the export-oriented information technology (IT) and business process outsourcing (BPO) companies don’t benefit much, as most of them had taken forward cover from banks at certain price points. Any depreciation of the rupee beyond that rate would only benefit the banks where they have hedged their forex risk.
However, BPO services provider EXLService has done something in agreement with many of its clients, where the benefit of a depreciating rupee directly goes to the clients, as also the risks due to any appreciation of the rupee. The Nasdaq-listed company has such agreements in almost a fourth of its overall contracts, wherein the clients take the risks of the currency and the company’s margins are protected.
“It works well both for us and our customers, which is sustainable in the long term. We don’t have to worry about the currency movements. It is actually good for our business because if our customers are getting lower price, they will want to give us more and more business,” said Rohit Kapoor, vice-chairman and CEO of EXLService.
How
This is how it happens. When the company signs a client, it charges an amount based on the rupee-dollar exchange rate at that point. If the rupee depreciates in the subsequent month, the company invoices a lower rate, based on the percentage. And, if the rupee appreciates by a certain percentage, it increases the invoice in the same proportion, in which case the customers pay more. This rate is determined based on the rupee-dollar exchange rate at the end of every month, says Kapoor, one of the company’s co-founders.
Does it help the company protect the top line? Kapoor says it only helps to protect the profits. For, when it invoices at a lower price, it affects its dollar-term revenues. “Let’s say we have fixed the price for a customer at $25,000 per person per annum when the rupee is at 50 against the dollar. If the rupee depreciated next month by 10 per cent, to 55, we reduce the price by 10 per cent and charge the customer $22,500. So, we make the same margin. But it impacts our revenues. When the rupee appreciates, it is just the other way around – the customers get charged a higher price and again our profit is protected,” added Kapoor.
Issues
This kind of currency risk-sharing strategy, however, is not common in the Indian IT/BPO sector. These companies still prefer forex hedging with bankers as the common de-risking strategy.
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“There are basically two ways how companies do the derisking of forex. One is to give the benefits or take the benefits to or from customers and the other is to hedge it out with the bankers. Hedging with bankers is always better, because if you hedge with the customers, the full benefits (when the rupee depreciates) will go to them,” says Sujit Sircar, chief financial officer of the Nasdaq-listed IT services company, iGate.
Experts, however, believe with the rupee continuing to depreciate, IT companies would soon have to start giving some of its benefits to customers. In a recent note to its clients, Kotak Institutional Equities had said “eventually, the benefit of the rupee depreciation will get passed on to the customer”.
Sircar says though some of the IT services companies have begun doing it (giving benefits to customers), as a percentage of their portfolio, “it won’t be more than five per cent”.