By Chandra Ranganathan and Sangeetha Kandavel
BANGALORE|CHENNAI: As Indian software services firms wait out the lull in demand, the depreciating rupee – the Indian currency has fallen by nearly 8% against the dollar since April – is opening up new opportunities while throwing up some challenges.
Besides the translational gains fluffing up revenues and profits, Indian IT firms could also earn some brownie points with their clients by passing on some of the foreign exchange gains as savings to its US clients. IT firms could also plough back some of the extra income into sales and marketing efforts while riding out the lacklustre demand.
The rupee boost could even help Infosys, which said it is holding off on pay hikes, to give out salary increments to its employees. In fact, its global sales and marketing head Basab Pradhan admitted as much during a Bank of America-Merrill Lynch investor conference last week when he said that a wage hike will be considered if growth surprises or “if a weak rupee provides cushion”.
Every percentage fall in the rupee, analysts estimate, boosts operating margins by at least 30-40 basis points. A basis point is one hundredth of a percentage. Of the $100 billion (Rs 5.5 lakh crore) export revenue that IT and BPO firms earned in fiscal 2012, nearly 58% was from the US, according to data available with the National Association of Software and Services Companies.
“We believe that eventually the benefit of rupee depreciation will get passed on to the customer,” Kotak Institutional Equities said in a recent client note. “However, in the interim, vendors can benefit from targeted investments.”
While the rupee depreciation will look beneficial in the short term it is likely to put pressure on pricing in future when clients seek discounts. Som Mittal, president of Nasscom, said that clients will demand pricing discounts when vendors are benefiting from foreign exchange gains.
“Clients, once they taste success with one vendor, can force other vendors to do the same, impacting pricing for everyone,” Kotak’s analysts wrote. CP Gurnani, CEO of Mahindra Satyam, agreed that the falling rupee will allow pricing cuts. Not only that, when the rupee swings back, clients are amenable to increasing price in arrangements called “mirror clauses”.
However, foreign exchange fluctuations will not immediately lead to contract renegotiations, but those contracts that are coming up for renewal or new contracts being discussed will take into account the foreign exchange levels.
“Several factors go into devising a contract, one of which is the exchange rate,” said Siddharth Pai, managing director at the Indian arm of outsourcing consultancy ISG. “Existing contracts won’t see re-negotiation but this will become a point of discussion for new contracts.”
Cognizant CFO Karen McLoughlin says the swings are neutral for the company because it has a very aggressive hedging programme. Cognizant has about $3.7 billion in outstanding hedges of its rupee expenses which will mature each month through 2015 at an average rate of 51.9 against the dollar.
(With inputs from Deepika Amirapu in Hyderabad)