The Hindu Business Line : Rupee strength sets off alarm bells

`Every one per cent appreciation of the rupee against the dollar reduces margins by about 30 basis points. Most players are countering the impact by hedging their inflows in the forward markets. But sustained appreciation nevertheless would hurt'

Hyderabad , March 28

THE recent surge in rupee against the US dollar continues to be a matter of concern for exporters. Coming as it were in the backdrop of sustained rise of the rupee, this development is being tracked and hedged in the software sector lately, which is predominantly US-centric.

According to the Chief Financial Officer of Satyam Computer, Mr V. Srinivas, "the impact of the strengthening rupee on IT sector profitability will be two-fold. The rising rupee will bring down the margins of Indian companies. Most of the Indian IT companies have a natural hedge given that 60-70 per cent of the expenses are not rupee-denominated. Our analysis reveals that every one per cent appreciation of the rupee against the dollar reduces our margins by 30 basis points."

"The second impact is on the translation of foreign assets such as receivables and cash and bank balances. An appreciation in rupee results in translation losses. To a large extent companies can protect against this loss by taking forward cover. The guidance that Satyam had given is exchange rate neutral and does not factor in any appreciation or depreciation of rupee against other currencies," he explained.

The Chairman and Managing Director of VisualSoft Technologies, Mr D.V.S. Raju, told Business Line "the dollar depreciation has become a matter of discussion and concern, with the rupee seeing a surge over the last few days possibly due to large fund inflows following the recent IPOs (initial public offerings).

"This has also indirectly impacted the companies. For us, this movement is unlikely to have much impact. However, there could be some marginal impact on the overall profitability."

Further, Mr Srinivas said "if the rupee continues to strengthen against the dollar the way it has done in the last 2 years, the profitability of the sector will be affected.

However, the behaviour of the rupee has to be seen against the basket of currencies and not in isolation to the dollar. For example, while rupee has appreciated against the dollar, it has depreciated against other currencies such as euro, and the UK pound, which to some extent offset the losses.

"Indian companies will have to focus on growing revenue from non- dollar-based regions to mitigate to some extent the risk of an appreciating rupee against the dollar."

About a year ago, the rupee had depreciated by 4-5 per cent a year against the dollar. This was great for the profitability of Indian companies, which generate a bulk of their revenues from exports to the West, particularly the US. Every per cent rise in rupee translates to a 40 basis points fall in Ebita margin on dollar denomination business.

According to an analyst report of SSKI India, most players are countering the impact by hedging their inflows in the forward markets.

But the positions typically cover only a quarter inflows. So the sustained appreciation is nevertheless hurting. The only way out is the US economy emerging stronger that could firm up the dollar further.