Indian rupee: Short-term gain, but long-term pain for IT firms

Written by P P Thimmaya | Bangalore | Updated: Jun 12 2013, 19:11pm hrs
A depreciating Indian rupee has always worked in favour of export-oriented Indian IT firms, but the volatile movement of the currency against US dollar is unlikely to bring any long-term benefits for the industry. The 8% deprecation of the rupee since April 30 would certainly boost the profitability IT firms because a 1% change in value of the currency has an impact of 30-40 basis points on operating margins.

The falling rupee could also stoke a rise in inflation rate, leading to a demand for higher wages from IT employees. For any IT company, more than 50% of its operating expense is constituted by wages and any change in this parameter could have a severe impact. Abhishek Goenka, CEO, India Forex Advisors, told FE on Tuesday that companies will have to constantly revise their hedging policies if there is such volatility in the currency movement.

Normally, Indian IT companies undertake one to three years of forex contracts with around 70-80% of their receivables being under cover with the rest being left to open positions. Goenka said Indian IT companies can accrue real benefit from a depreciating rupee only if it is accompanied by genuine business demand in the market, otherwise it would be mere short-term gain. Indian IT companies also follow differing forex strategies with some of them entering into long-term contracts, while others take short-term positions.

For example, Infosys takes forex cover of between three and six months, while Wipro undertakes hedging contracts for a longer period of time. TCS adopts the cash flow hedging strategy. This differing forex hedging strategy is also reflected in the kind of gains or losses each company makes on their exposure. TCS for FY13 had a forex gain of R155.29 crore, while it suffered a loss of R156.90 crore in FY12. Infosys made a forex gain of R169 crore for FY12, but got slashed to just to R34 crore in FY13, thanks to its hedging initiatives.

Currencies such as euro, yen and Australian dollar, too, play a big part in the fortunes of Indian IT firms. For instance, Infosys took a hit of $6 million in forex hedging in the fourth quarter of FY13 due to cross currency movement.