Declining Rupee Brings Gains for IT Giants, Woes for Small Units

BANGALOREâ€" Though the steep fall in the value of the rupee has affected several sectors of the Indian economy adversely, India’s information technology giants, Tata Consultancy Services, Infosys and Wipro are expected to be the biggest gainers from a weak rupee.

“At 65 rupees to a dollar, the three will approximately gain an additional 5,700 crore, or 5.7 billion rupees ($86 million), 3,600 crore and 2,700 crore, respectively, on net dollar earnings for 2013-14,” said an Economic Times Survey report published in August.

The rupee ended at 66.27 against the U.S. dollar on the Sept. 5, bringing its decline since early May to a little more than 20 percent due to concerns about the country’s widening current account deficit. The record low seen last week was 68.85 rupees to the dollar.

Infosys generates 97 percent of its revenues from the U.S. and Europe. The company is likely to use rupee depreciation as a competitive lever to rebuild lost market share.

“In general for Indian IT, the costs would go up by 5 to 6 percent, while revenue would go up by 12 to 14 percent. Thus a net gain of 7 to 8 percent in near term,” said Rakesh Gupta, managing director Allianz Cornhill Information Services in Trivandrum, Kerala. “The costs and revenue cycle have a time lag and thus immediate quarterly results may show up increase in margins by high of 15 percent and then come down to 7 to 8 percent,” he added.

But Infosys officials remain guarded in their approach.

“The depreciation of the rupee is positive for all exporters including Infosys,” said V. Balakrishnan, an Infosys board member and the former chief financial officer of the company. “However, extreme volatility in the currency will hurt our ability to hedge effectively.”

Tata Consultancy Services generates 92 percent of its revenues from U.S. and Europe and Azim Premji’s Wipro generates about 90 percent of its revenues from the U.S. and Europe. “As a policy we do not comment on the rupee depreciation,” said senior officials at Tata.

The actual effects of the rupee’s decline will likely be revealed in the coming earnings announcements by these companies. However, advantages at the operating levels would not necessarily trickle down to net profits. IT companies are in the practice of hedging their foreign exchange risks, dampening any immediate upside from currency drops. And they typically lock in an exchange rate for future transactions.

“If the currency remains weak for a long period of time these companies are set to gain, because the new projects they draw out now will be based on the current exchange rate,” said Sachin Bhatia, vice president of Drishti Soft Solutions based in Gurgaon, Haryana. “If there is too much volatility, they might not benefit a lot.”

The fall in the rupee will benefit Indian companies with overseas arms as it will increase the dividend amount that comes into the coffers of the Indian parent without increasing the operational costs on the foreign subsidiaries. Tata, India’s most valuable company and largest software exporter, received 1,050 crore as dividends from overseas subsidiaries in 2013.

However, the entire industry does not benefit from a depreciating rupee. A substantial chunk of Indian companies whose costs and revenues are in Indian rupees are hit as badly as other sectors of the economy.

“These companies, in fact, import some goods from external markets. Their competitive advantage goes out of the window,” said Mr. Bhatia. “It only benefits those big services and product companies that sell globally and have a competitive advantage in the global market.”

Even the big companies are cautiously optimistic.

“It is extremely difficult to take a long-term view on the currency,” said Mr. Balakrishnan of the Infosys. “The clients are focusing on total cost of ownership and volatility in the currency does not enter the pricing discussion.”

Since economic recession set in the U.S. in 2008, the software industry in India has been going through a bad phase. Most companies, including market leaders, talked openly about the delays in starting their offshore projects. Also, pricing of their products and services had been under pressure as most Indian companies were trying to cover high costs. Hence, there was almost no positive news on the pricing front. In addition, the companies are facing a tough time in getting visa permits to send their employees to work overseas, curtailing their offshoring advantages. The depreciating rupee has given them a breather, if not a permanent reason to cheer.

India’s economic growth has slowed sharply in the last two years, falling from 9.2 percent in the financial year ending in March 2011 to just 5 percent for the year ending in March 2013. Sridhar Sharma, Chief Technology Officer at the Dallas-based Ugam Interactive, argued that in the long run, the negative economic growth of the country will affect the short term gains of the software industry.

“Overall, a weak currency over the long term is more damaging for a country like India, where imports far exceed exports,” he said. “Increasing cost of living and inflation will catch up and impact even those sectors that initially did well due to a weaker currency.”

Raksha Kumar is a Bangalore-based freelance journalist.