In the last one year, the negative impact of the strengthening rupee has been more in the news than its overall impact on the economy. A strong rupee might have hit the bottomlines of exporters, especially IT-ITeS companies and the textile sector, but importers, forex borrowers, and MNC clients have gained from it.
Normally, rupee appreciation is considered a sign of the economy doing well. Then why is there such a hullabaloo over the strengthening rupee The answer is that more than 75% of Indias exports go to the US. And the IT/ITeS sector gets about 65% of revenues from the US market. The rupee has strengthened about 11% since January, hitting IT firms, as they bill their clients in dollar. For instance, rupee appreciation has eaten into CD maker Moser Baers topline by 12%, according to the companys CMD Deepak Puri.
The worst hit are the BPOs and the small IT companies. Strengthening of rupee, primarily due to reasons like capital inflows, is certainly of serious concern, says Satyam Computers chairman Ramalinga Raju.
Assocham estimates that salary payments in the sector, which were growing at 64% till last year, have slowed to 25%. The sales growth of the top IT firms has come down from about 45% in first two quarters in previous fiscal to 27% this fiscal.
The cumulative wage expense of Wipro, TCS, Satyam and Infosys was Rs 6,067 crore in the second quarter, compared with Rs 5,164 crore in the Q2 of the previous year. Q-on-Q growth in the cumulative salary expenses of these companies was almost zero as the total salary amount in first quarter of this year was Rs 6,047 crore.
But if sharp gains in rupee have made Infosys and TCS less attractive on the stock market, has resulted in forex gains for telecom companies like Bharti Airtel, Reliance Communications and Idea Cellular by reducing their dollar payables.
Last year, Bharti Airtel revised the value of its outsourced IT functions to IBM to $1 billion. In July, it awarded Ericsson a $2 billion contract for expansion of its GSM/EDGE network. Nokia Siemens got another $900 million contract for overall network expansion.
What is bane for the IT industry has turned out to be a boon for the telecom sector. As domestic telecom companies will make payment to these companies in dollar, they will gain from the foreign exchange by paying less in rupee terms, says an expert. And the trend is expected to continue.
Meanwhile, Gerard Lyons, chief economist and group head, global research, Standard Chartered, UK, says that the rupee is likely to strengthen further in the coming years and India should think about rupee not just against the dollar, but against other currencies as well. ICICI Bank MD MV Kamath has cautioned that it would appreciate by at least a rupee or two every year for the next three years.
But IT companies are confident that their hedging programmes and cost management methods will help them expand margins during the rest of the year. At the end of Q2, TCS had about $2.6 billion outstanding in hedges. HCLT had recognised foreign exchange gain of $9.6 million during JanuaryMarch 2007 when the rate as of March end was Rs 43.52 to a dollar.
However, according to Alok Aggarwal, chairman Evalueserve, most Indian companies in the IT-ITeS sector would have their net profits before taxes reduced by 6% by the end of March 2008. Since the Chinese Yuan and Eastern European currencies have not appreciated substantially, these countries are likely to become more formidable competitors in the IT and ITES sectors as well, he says.