As the rupee breached the 71-mark against the US dollar, some clients of software exporters are seeking to renegotiate contracts, which could potentially offset some of the margin gains.

The rupee has been among Asia’s poorest-performing currencies this year, having lost nearly 10 per cent since January. According to analysts, one per cent depreciation in the rupee adds 30 basis points (0.3 per cent) to margins.

While this definitely adds to the cheer as it positively improves margins of software exporters, companies are increasingly seeing clients coming back to renegotiate contracts.

“Some of the existing contracts, notably in BFSI and energy/utilities, are coming under the renewal hammer,” said a senior Vice-President of a top software exporter. A CEO of a mid-size company added that some clients are asking for a 5-8 per cent price cuts.

Many in the industry spoke of similar experiences and added that clients who have short-term contracts were asking for these price cuts.

For example, a brick-and-mortar retailer, who is building an omnichannel platform (where transactions can be done on mobiles, kiosks etc.), is apparently asking for a price cut as the same job can be done by start-ups at lower rates and as efficiently, according to an analyst who consults for the top 3 software exporters.

For some exporters, price-cuts are not yet on the horizon, but they are seeing demands for “value-added” services.

Also, unlike in the past, software exporters are citing increased volatility in the last few years as one of the reasons for not giving a dollar figure on the amount they hedge. For example, TCS now hedges revenues net of expenses across major currencies. Earlier, it used to commit a certain number as a part of its hedging efforts. Additionally, TCS hedges on a rolling 2-3 quarter forward basis using financial instruments that include forwards. Margins of Infosys and TCS have been under pressure but have largely remained stable in the 23-25 per cent range.

In the last quarter, when the rupee was around 68, it helped TCS improve its margin by 0.7 per cent. Infosys also follows a similar strategy.

It has billed around 80 per cent of its revenues in US dollars and the remaining in the Australian dollar, the pound and the euro. Brokerage analysts, however, point out that the rupee depreciation is a positive for Indian IT. “They have been fortuitous that rupee depreciation has absorbed margin headwinds resulting from pricing pressure, investments in digital and project staffing challenges resulting elevated rejection of H-1B applications,” according to Kawaljeet Saluja and Jaykumar Doshi from Kotak Institutional Equities Research.

But these headwinds exporters face relating to margins is a near-term antidote. The long-term issues continue to remain.

American customers are more concerned that the leadership of Indian IT services firms is increasingly out of sync with what US customers expect.

Customers expect Indian firms to finally start investing in building stronger capabilities in idea generation, innovation, collaboration, and organisational transformation, said Peter Schumacher, CEO, Value Leadership Group.

The strategic challenges are related to culture, brands and revolve around finding new ways of thinking, building business domain knowledge and having differentiation, he added.

Analysts opine that companies will invest some of their rupee gains into hiring in the US and in technology areas such as AI and Machine Learning.

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