The rupee's fall against the dollar is likely to increase the cost of operations over a period of time for the $108-billion Indian IT-ITes industry, eroding benefits that the depreciating currency usually brings for the sector's export-oriented services.
Conventional logic has it that for every 1% fall in the rupee, the operating margins of IT services companies increase by 30-50 basis points (bps), but this is unlikely to hold true if the currency continues to trade at this level.
For the Indian IT industry, which is highly dependent on people, salaries account for 55-65% of the costs, and this component could see an increase if the declining rupee fuels inflationary pressure. Industry executives said the rising inflation rate due to a falling rupee will bring forth the demand for wage increase, and such hikes will impact profitability.
“A depreciating rupee for one or two months will bring some benefits in terms of profitability but if this level sustains for a longer period, it will bring the pressure of hiking salaries while also increasing the cost of running our operations,” Mindtree CFO Rostow Ravanan told FE.
The hiring in the industry is showing steady signs of pickup over the last few months and this will boost the demand for experienced human resources, which are in short supply, leading to competing wage hikes.
“For HCL Technologies, the gains from the rupee's depreciation is likely to get absorbed due to negative impact of wage hike during the current quarter,” said Angel Broking IT analyst Ankita Somani. The Delhi-headquartered IT firm announced a wage increase of 8% for employees in India and a 3% hike for on-site employees.
HCL Tech expects to have take a 60 bps hit on its margins in the current quarter.
The sharp decline of the rupee over the last few months is due to concerns over the high current account deficit (CAD), surging gold and other imports, and exports that are not buoyant.
Capital outflows on account of government policies and the international factors like the expected tapering of quantitative easing by the US Federal Reserve.
Tech Mahindra CFO