The Hindu Business Line : Strong rupee means fewer staff on bench

Chennai, Aug. 26 Reacting to the rupee strengthening against the US dollar, Indian IT software services companies are increasing the number of people whose work can be billed for revenue with clients.

In other words, they are all increasing their utilisation rates.

For the quarter ended June 2007, most companies have seen a rise in those rates compared to either the immediately preceding quarter or the year-ago quarter. The accompanying table gives us utilisation figures for the three said quarters, as a percentage of total number of employees, including trainees.

Industry watchers feel that this is one measure that companies can quickly take to react against a stronger rupee. (When you earn in dollars and convert it into rupees for reporting purposes, a stronger rupee would mean lower profits.)

How much does a strong rupee affect Indian vendors? Mr Gaurav Dua, analyst with Sharekhan Securities, has earlier indicated to Business Line that a one per cent increase in the rupee against the dollar would result in the impact of about 40 basis points in operating margins.

Now, how much of that impact could be minimised by increasing utilisation rates?

A spokesperson for Cognizant said that for “every one per cent increase in utilisation of our global workforce, margins go up by about 50 basis points.”

Take an example: Assume that the average company in this industry makes Rs 20 operating profit (ie, profit excluding expenses such as depreciation, interest and taxation) on revenues of Rs 100.

Now, when the rupee went down from Rs 41 to 40.59, that company would only make Rs 19.6 profit for the same Rs 100 as revenue, because of the loss in conversion from dollars to rupees.

If this company increased utilisation rates by one per cent (that is, out of, say, 70,000 employees, it made 700 of its employees billable - from a state of being ‘benched’), it would make Rs 0.50 more in profits.

In this example, this company has reacted to the rupee inching up one per cent against the dollar. In reality, the rupee has appreciated nearly 10 per cent since April this year.

Companies are also addressing the issue through productivity improvements using automated tools and moving more work offshore to India, among other things.

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