The rupee has been sliding ever since China decided to re-set the yuan reference rate. From about 63.76 against the US dollar in the first week of August, the currency is now at 66.5 – down 4 per cent. But this might not result in improved business margins for IT companies in the September quarter.
The impact of the rupee-dollar movement has not been percolating to the tech companies’ margins. In the June quarter, the average rupee rate against the dollar was 63.63, down from 59.87 in the same period last year, but margins of tech companies narrowed by about 1.1 percentage points in this period.
One reason could be higher dollar spends in onshore locations, which may lead to lower net dollar earnings. In the June 2015 quarter, Infosys had about 29 per cent of its headcount in onsite locations, three percentage points more than two years ago.
In MindTree, 18.6 per cent of the employees were in onsite locations, up from 17 per cent in June 2014 and 15.1 per cent in June 2013.
The higher proportion of non-dollar revenues could be another factor dampening the positives from rupee depreciation against the dollar. TCS, for instance, derives over 40 per cent of its revenues from currencies other than the US dollar; with 14 per cent in British pounds and about 8 per cent in euros.
Changed scenario
According to Akhilesh Tuteja, Partner and Head, Technology, at KPMG: “Companies now have a fair bit of contracts denominated in other currencies, such as the euro. Earlier, if the rupee dipped against the dollar, it dipped against the euro and other currencies, too. So, a weak rupee directly resulted in margin saving. But now, it is different. Each currency has its own life cycle and behaves differently.”
In the last 12 months, despite the rupee depreciating 6.5 per cent against the dollar, it has appreciated by a sharp 11 per cent and 14 per cent, respectively, against the British pound and the euro.
Also, today, the big names in the IT space have a re-pricing clause in their long-term contracts. Clients use these clauses to re-negotiate prices as the rupee falls, says N Sudarshan, Senior Director, Deloitte in India.
Hedging against currency risks can also depress the benefit, if the hedge is taken at a wrong level.
Says Jamal Mecklai, MD and CEO of Mecklai Financial: “IT companies used to hedge for three, four or even, five years earlier. But now, they are moving to short-tenure contracts. This is because, one, it’s getting difficult to get a right view and two, hedging losses invite questions from shareholders. Many companies today hedge just 50 per cent of their exposure…”
Margin pressures What nullifies the benefits from a weak rupee is also the mounting pressure from competition on pricing, increased investment in new age solutions and higher salaries. With growth starting to moderate, companies are not hiring as many freshers now, thereby reducing the number of employees at the base of the pyramid.
Also, “the average tenure of IT contracts is reducing, which means companies are renewing contracts more often than before, resulting in higher sales costs,” adds Tuteja of KPMG.