Jan 4, 2012|
Rupee depreciation: A mixed bag for IT sector
Business environment has not been conducive for quite some time. Factors such as prevailing uncertainty in global economic environment, stubborn inflation, high crude prices, high interest rates and declining rupee have affected more or less every business in some way or the other. Most businesses are complaining about the sharp rupee depreciation in the past few months as their import bills are ballooning. In turn, it is adversely affecting their margins. However, there is one sector which has got good reasons to feel happy about the rupee situation.
At present, Indian software companies are facing a tough time due to economic problems in the developed economies. More companies are now openly talking about the delay in project starts. Also, pricing has been under pressure. At best, it has remained stable only. Hence, there were almost no positives on the pricing front. In addition, they are facing a tough time in getting visa permits to send their employees to work overseas. This would curtail their offshoring advantages. The software sector has already lost its tax advantage at the beginning of the current financial year. In a situation, when most of the things were coming as headwinds, Indian IT (Information Technology) companies found respite in the rupee depreciation. How?
Indian software companies such as Infosys, Tata Consultancy Services (TCS) and Wipro get most of their business from the developed economies. A significant part of their revenues are in US dollars. Hence, deprecating rupee would definitely be boosting their sales growth as well as margins. In the past three months, rupee has depreciated by almost 8%. The positive effect of this would be revealed in the coming result announcements by these companies. However, all positives at operating levels would not trickle down to the net level. IT companies are in the practice of hedging their currency risks. As a result, the forex loss on account of hedging would be taking some of sheen out of the reported results.
Well, no doubts that the rupee would help the Indian IT companies by bailing out of the current tough business environment. Now the question arises. Would this advantage continue?
There could be many possibilities. One, rupee starts appreciating. In this case, the advantage would automatically start waning. But what if the rupee remains at the present high levels or depreciates further? The first thought that may cross your mind that it would be a dream situation for the Indian IT industry. But hold your thought for a moment. There is a flip side.
There are many big companies such as HCL Technologies out there in the software sector which believe in an aggressive growth strategy, at the expense of margins. Then, there are companies who invest the extra earned margins into business growth. The margin gains due to the rupee depreciation may set a stage for price war in the whole sector. Also, there might be pressure from the clients' side to pass some of the benefits to them. All this would finally, erode the pricing dynamics in the sector which is already under pressure at the present moment. Hence, gradually the benefits would go away.
Hence, we believe that stable rupee is the best possibility for the software companies. After all, these companies are in the business of IT services. Not in the business of managing currencies.
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