Rupee rise to hit margins of IT majors

The rising rupee has become a major cause for concern among software exports firms. The IT industry, especially tier-II firms, which are not adequately hedged, will take a hit.

"The rupee appreciation is impacting the overall earnings of software exports firms. With entire revenues accruing from exports, we have already observed an impact of 2-4 per cent on the revenues of some notable firms," said S Sabyasachi, Senior Director, neoIT, a services globalisation consulting firm.

Analysts contend that the continued trend of the appreciating rupee could potentially have an impact of 50-200 basis points (bps) on the companies' operating margins.

"Every 1 per cent appreciation in the rupee leads to a 30-50 bps impact on the margins depending on the company," pointed out Sabyasachi.

Rostow Ravanan, CFO of the Rs 600 crore MindTree Consulting, is worried about the government's unpredictable policy on stabilising the rupee.

"The volatility of the rupee is not induced by the market. The rupee is becoming volatile because of the government's policy. Someday, the RBI chooses to intervene and some days, it does not," he said.

Even IT bigwigs are feeling the heat. Said V Balakrishnan, CFO, Infosys Technologies: "Every 1 per cent change in the rupee-dollar rate will have an impact of around 40-50 basis points on operating margins. We are taking steps to hedge our exposure pro-actively in order to mitigate the impact."

"We are also trying to bring in efficiency in various costs to mitigate the impact. The improvement in billing rates could offset some of the currency impact. We are today seeing a stable price environment. At the end of the day, if the currency movements are drastic then the impact would be felt by all IT companies," he added.

The tier-II companies, which generally don't deal with forex fluctuations in a positive manner, are likely to take a hit in the long run.

"Rupee appreciation will impact operating margin as well as the overall profitability. There will be a strong upward pressure on billable rates on the customer. The appreciation will eat into our revenues. Since our expenses are in rupees, profitability will also take a hit," said B Ramaswamy, President and Managing Director, Sonata Software, a Rs 900 crore software exporting firm.

Agreed R S Rethinasamy, V P (Finance), of the Rs 170 crore Aditi Technologies: "Sales in rupee term gets reduced if it is not hedged. If rupee appreciation moderates the inflation rise, the pressure on salary cost will be reduced. That can benefit the software industry."

iGate Global Solutions, a Rs 800 crore firm, admitted that rate negotiations with clients will become inevitable.

"For iGate, the margin impact will be minimal in the first two quarters owing to rigorous hedging process. The impact will be visible from the third quarter of the current financial year. It is inevitable for the industry to go to the clients for rate negotiations. We expect them to give a hearing as they too understand that the rupee parity has changed," an iGate spokesperson pointed out.

For MindTree Consulting, the impact felt will not be "shattering" compared with other sectors such as apparel since its margins are high (15 per cent). "We believe the business is in good momentum. We will continue to drive higher value for the business," Ravanan stated.

Hedging has assumed importance for all these companies. "We were hedging before and continue to do it, depending on the market scenario. The forward premiums for dollars are again linked to the current spot rate, which has appreciated to a 9 year high and that is our worry as an exporter," said Ramaswamy.

Concurred Rethinsamay: "If we book forward cover, we will be able to lock in the rate or get the premium. If we leave the exposure unhedged, we do not know where it will land. That is the worry."

The IT industry in the country has started diversifying globally in order to reduce its exposure to the US market. The IT bellwethers have started focusing on Europe in a big way.