India’s “Cyberabad” Smiles as the Rupee Falls

Jagadeesh Nv/European Pressphoto Agency A photo illustration showing a U.S. Dollar note and Indian rupee coins in Bangalore, Karnataka, on Aug. 29.

HYDERABADâ€" As the Indian government, economists and investors fret over the Indian rupee, the software industry in Hyderabad should have had a reason to smile as the local currency hit a record low against the U.S. dollar.

Over 300,000 technology professionals working in major software and technology service companies, helped their firms earn over 500,000 million rupees last year, of which between 85 to 90 percent were generated from dollar contracts. This year, a historic fall of the rupee would in theory mean a huge gain for the companies in Hyderabad and across the country as they repatriate their dollar earnings into rupees (On March 31, one U.S. dollar converted to 54.3303 rupees and on August 28, a dollar fetched 68.80 rupees, which meant substantial margins.

But in fact, the tech industry in India is not likely to see much of an increase in revenues in rupee terms, executives say.

“The biggest truth of the Indian software industry is that the big players are the industry,” said Vijay Debbad, co-founder and managing director of Magnaquest Technologies, which is based in Hyderabad, the capital of Andhra Pradesh. “Most of the export revenues are earned by the top 20 companies in the country. But they often hedge dollar rates, thus making no gains from dollar-rupee fluctuations. In fact, despite better revenues and profits, most large companies do not like fluctuations because it impacts planning and quarterly revenue guidelines.”

B.V.R. Mohan Reddy, founder and chairman of Infotech Enterprises, said a 1 percent appreciation of dollar against the rupee typically gives tech companies an additional 30 basis profit points, or 0.3 percent gain. Infotech, Hyderabad’s largest homegrown software enterprise, has global revenues of over $400 million, with Boeing and Airbus among its clients.

However, he said, the Indian tech industry typically hedges 70 percent of the U.S. dollar contracts against foreign currency fluctuations, so the sinking rupee was not likely to provide a huge bump in revenue. Moreover, he said, higher production costs at home would offset much of any gain from a favorable foreign exchange rate.

The sinking rupee is much more likely to have an impact on small and medium-sized players like Magnaquest, with revenues between $10 million to $20 million annually, but not necessarily for the better.

“We don’t hedge for foreign exchange fluctuations, because our expenses are largely in rupees,” said Debbad. Our bottom line impact will be strong, but since our market focus is on developing economies more than the U.S.A., our business will take a beating. Clients in Africa, South America and across Asia will have to spend more to pay us in dollars, and hence business and sales cycles will be impacted.”

What also affects a company’s bottom line is how many of its employees are in India and how many are overseas. “Some of the companies, given the nature of their clients, have larger operations in the U.S., with greater number of local employees based there,” said Ramesh Loganathan, vice president of products at Progress Software. “Such companies would tend to have lower profit basis points.”

Noah Seelam/Agence France-Presse â€" Getty Images Employees outside the headquarters of Satyam Computer Services Limited, a company now known as Tech Mahindra, in Hyderabad, Andhra Pradesh, on Jan. 9, 2009.

The larger worry for software companies is that the weakening rupee is signaling investors’ fears of slower growth in India, hammering the local stock market and eroding confidence in the nation’s prospects.

“The issue is about the reason for this change,” said Mr. Debbad. “It is the symptom of larger macro factors. On one hand, the rupee is falling because of larger uncertainties in the economy and exposes the fundamentals. This can hardly be a cheerful factor for any industry. If this points to further slowing down of the G.D.P. and growth rate, it is dampening.”

The one possible bright spot, said Mr. Debbad, is that the rising dollar may be a sign of a strengthening U.S. economy. “This is the best news, though the impact will be seen only after a couple of quarters,” he said.

Even the foreign exchange rate gains for tech companies turn out to be small, Hyderabad is poised to benefit. The city has large companies of three categories: global, national majors and locally based. Indian majors like Infosys, Wipro and Tata Consultancy Services don’t report their Hyderabad earnings separately; these get attributed to their headquarters, which are in Bangalore and Mumbai.

The Andhra Pradesh government estimated that Hyderabad’s total software exports were 500,000 million rupees in the 2012-13 fiscal year, which ended on March 31 taking account the total number of technology employees, per capita production and earnings, real estate occupation, taxes and other factors.

Further estimates on software exports and growth prospects by the state government project a growth of over 12 percent, pushing up the city’s export revenues to the tune of around $11.2 billion.

The rupee’s woes aren’t likely to discourage entrepreneurs like Chinmay Rajula, 22, a student at International Institute of Information Technology. He struck upon an idea to monetize the intense between movies and fashion in Hyderabad. He set up an e-commerce website, Clap One, where cinema lovers can login and buy the clothes their favorite actors were wearing in a movie. Mr. Rajula’s idea seems to have taken off; his site has received over 150,000 hits and 3,000 business transactions since its launch in March. Mr. Loganathan of Progress Software, who heads India labs for a major U.S. software company and is a keen incubator and mentor, said he believed that Hyderabad’s ecosystem has evolved to groom and support entrepreneurs. “There are over 1,500 registered tech start-ups in Hyderabad,” he said. “We estimate over 3,000 currently operative companies in existence, maybe even 5,000.”

Although Hyderabad’s reliance on the dollar economy is helping it brave the Indian economic downturn, there is a feeling that the technology entrepreneurs in the city are not being ambitious enough.

“We still aspire for land over intellectual property or scientific achievements,” said Srini Raju, who founded Peepul Capital. He is considered one of the most successful of investors in Hyderabad, having profited handsomely from his stakes in highly successful enterprises like IntelliGroup, VisualSoft, MegaSoft, vSoft and Sify.

“We are nowhere ready to create an Apple, a Facebook, Google, Skype or Twitter. Our horizons are mid-term and most entrepreneurs would happily retire after a $100 million acquisition,” Mr. Raju said.

Sriram Karri is a writer based in Hyderabad. His forthcoming novel, The Autobiography of a Mad Nation was long-listed for MAN Asian Literary prize.