The Hindu Business Line : `New IT clients are coming in at higher price points'

Chennai June 7 To the IT industry, the rising rupee is a cause for concern. An appreciating rupee significantly affects the profitability of the information technology (IT) and the IT enabled service (ITES) sectors.

The rupee has risen close to 9 per cent against the US dollar, 7.5 per cent against the euro and 13 per cent against the Japanese yen in the last six months.

"More particularly the smaller firms in IT/ITES, which are not adequately hedged, are likely to get significantly affected," cautions Mr Pradeep Udhas, Global Partner-in-Charge, Sourcing Advisory, KPMG, in an interaction with Business Line.

Excerpts from an interview.

Do we have a measure of the likely impact?

Industry sources estimate that the continued trend of appreciating rupee can potentially have an impact of 50-200 basis points on the companies' operating margins.

Tata Consultancy Services Ltd (TCS) has stated that every percentage point depreciation in the dollar translates into approximately a 40 basis points reduction in TCS' net profit margin (net profit as proportion of total sales).

What are the strategies adopted by Indian companies?

Hedging the currency risk is a common strategy. Almost all Indian companies have started hedging their currency positions. Hardly any of these would be keeping the dollar exposure unhedged. For instance, TCS maintains close to $1.5 billion as hedge for the next two years.

Some companies park a part of their dollar deposits abroad, so as to avoid the risk of currency movements.

This may be difficult for tier-3 companies, which are small and perhaps are not as sophisticated in hedging.

Can the risk be transferred to the customer through pricing adjustments?

IT companies have increased billing rates over the last few quarters. Companies are trying to bring in efficiency in various ways to mitigate the impact. The improvement in billing rates can offset some of the currency impact. For example, Infosys saw its blended rates increase by 4.9 per cent in FY07.

More importantly, new clients are coming in at higher price points of around 3-4 per cent. This may be difficult as the local companies are not affected by this trend and compete very well with the global delivery capabilities of the Indian companies — as there is very little to differentiate in "body shopping," market.

Should firms begin to look at newer markets?

Yes, client diversification across geographies is yet another strategy. Indian IT/ITES companies have started diversifying globally in order to reduce their exposure to the US market. For instance the big five Indian IT companies, which derive about 60-65 per cent of their revenues from the US, have now started focusing on Europe in a big way.

Take the case of Infosys. It saw business in Europe growing at larger rate than in the US. Infosys's revenue from Europe increased to 26.4 per cent in FY07 (24.5 per cent in FY06); an absolute growth of 55 per cent.

On the need for the RBI intervention.

Industry observers state that unless the RBI (Reserve Bank of India) intervenes, the Indian currency may continue to appreciate. However, the RBI seems more concerned with tightening liquidity.

Its recent comments indicate that the RBI may once again tighten liquidity through an increase in CRR (cash reserve ratio). Till the time RBI decides to mop up dollars from the market, the rupee may continue its relentless upwards move.