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Swinging to the tune of the rupee
Last year, when the Indian rupee began appreciating vis-à-vis
the US dollar, smart Indian companies started signing forward contracts to mitigate
the impact of the rising rupee on software exports. But after the recent elections,
the rupee is again weakening against the dollar, putting these companies at
risk. VENKATESH GANESH analyses the strategies of Indian software services companies
as they try to keep pace with the rupee’s ups and downs
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K R LAXMINARAYANA says that Wipro’s forward
contracts and other proactive measures enabled the company to realise better
rates than the prevailing spot rates |
THE disclosure was startling, to say the least. Infosys Technologies, India’s
IT bellwether, announced last year that the company had lost Rs 100 crore ($21.6
million) during the first quarter (April-June) for fiscal year 2003-04 on account
of the rupee’s appreciation against the US dollar.
But why is the appreciation of the rupee causing sleepless nights for Indian
companies? Consider the following statistics. More than 90 percent of Indian
software exports go to the US market. When the rupee started appreciating, some
analysts predicted that it would be a short-term trend. But after a few quarters—and
more than a few hard punches—Indian software companies realised that this
was not a nightmare that would vanish as morning dawned. Instead, it heralded
a new era for the Indian IT industry—and we aren’t talking about
BPO success stories either. While the BPO drama was unfolding, the steady appreciation
of the rupee was playing out its own version of “Nightmare on Rupee Street”.
The rising value of the Indian rupee has certainly played havoc with the bottom-lines
of many companies. To get a clearer picture, flash back to 2002. In that year,
for every dollar worth of exports, an exporter got nearly Rs 49. Cut to December
2003, when an exporter got Rs 45 for every dollar, and you’ll see that
we are talking about a fall of approximately seven percent.
Rising rupee
The almighty dollar proved to be vulnerable after all. Since the beginning of
2003, the rupee rose 4.6 percent against the dollar. Towards the end of that
year, when companies announced their results, there was a dip in the category
‘other income’ as a result of the appreciating rupee. This was in
the range of 24 percent. This impacted the profitability of most companies.
For instance, in the quarter ended March 2004, the net profit of the whole IT
sector was Rs 1,209 crore, a fall of two percent on a sequential basis (compared
to Rs 1,231 crore in the previous quarter).
So how did Indian companies react to the situation? For one, it prompted them
to look seriously at the concept of ‘hedging’ their investments
to minimise risk. Says K R Laxminarayana, corporate treasurer, Wipro, “When
the rupee was softening against the dollar, we decided to take a forward cover
to the tune of $950 million to insulate the company against the hardening rupee.”
 According to analysts,
as of March 2004, Infosys had a forward cover of $180 million and Satyam of
$40 million. However, since then, both Infosys and Satyam have increased this
to $250 million and $130 million respectively. Says a spokesman from Infosys,
“Our strategy to counter the appreciating rupee was based on the fact
that we’re a net foreign exchange earner. The forward contracts may not
fully
neutralise the impact, but they help us to reduce the impact to a certain extent.”
Greenback blues
While large software exporters quickly caught on to the necessity of managing
foreign exchange exposure wisely, many mid-sized companies had to react rapidly
as the rising rupee could have threatened their very survival. Indeed, many
small and medium (Tier-II) software exporters looked at the situation practically
and spread their currency risks. Most did this by trying to prevail on their
overseas buyers to settle for payments in currencies other than the US dollar.
While all this sounds fine in theory, the ground realities are different. Says
Laxminarayana, “Everything depends on the client’s needs. Even if
clients from Europe prefer to do business in their respective currencies, they
do a lot of their billing in US dollars as well. So we have to heed a client’s
request.”
Consider Mastek, which wasn’t heavily affected even when most other Indian
companies were. Says Jamshed Jussawala, general manager, Finance, Mastek, “We
were not impacted in a big way since most of our business comes from Europe.
Moreover, our UK subsidiary bills clients in pounds sterling, and this stands
us in good stead.” However, even Jussawala agrees that Indian companies
have to proactively adopt a hedging mechanism to cover risks, and not look merely
at billing in different currencies.
The writing on the wall is clear for mid-tier Indian companies.
Asserts Venkat Vallabhaneni, founder and chief executive officer, Accurum (formerly
known as Pinnacle Info Solutions), “Companies need to hedge more since
it is not their job to speculate about rupee movements. Prudent forward cover
of forex is one way to mitigate the ills of fluctuating forex movements.”
Looking forward
The deal in a forward contract is that the exporter (with
a receivables exposure) sells to a counter-party (importer) who is keen to buy
a cover in the forward market. On the maturity date, the dollars are sold at
the contracted rate. Since the dollar weakened faster in March (as the Reserve
Bank stayed away from the market), IT companies with forward contracts maturing
in this month were able to mitigate losses. For earlier months in 2003-04 too,
there were gains in the forward segment for exporters, but not to the extent
seen in March. “Our forward contracts and other proactive measures have
enabled us to realise better rates than the prevailing spot rates,” says
Laxminarayana. They may not reduce losses significantly, but they do soften
the impact.
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According to VENKAT VALLABHANENI, companies need to
hedge more since it is not their job to speculate about rupee movements |
Depreciate and perish?
Just when companies had prepared themselves to counter the rupee’s appreciation,
the rupee turned out to be a party-pooper, and decided to depreciate against
the dollar. This has resulted in Indian IT firms going back to their boardrooms
for a rethink. In the period when the rupee appreciated, these companies had
taken forward cover to mitigate risks. While on an average, for the full financial
year in 2003-04, the rupee had appreciated by 5.3 percent, in the last few weeks
it has depreciated almost 4.8 percent against the dollar. Explains an analyst
from a global equity research firm, “While Indian companies in general
will gain from the falling rupee, firms which have hedged aggressively will
negate the strategies they have taken to counter the appreciating rupee.”
This has led to another interesting situation. With the rupee’s new-found
strength, companies that had hedged aggressively might have to bear the brunt.
“Companies such as Infosys and Satyam, which have fewer hedged receivables
than firms such as Wipro, should be among the biggest beneficiaries of a weak
rupee, assuming that the rupee remains at its current state,” says an
analyst from a leading equity research firm. He feels Wipro stands to lose from
a weak rupee considering the heavy forward covers ($950 million) that the company
has taken. Though there is short-term concern over Wipro’s hedging strategy
in the case of a weak rupee, most analysts believe that in the long run Wipro
may actually gain as the dollar has been steadily falling against other currencies.
Weathering the storm
Looking at the industry in totality, could the unpredictable behaviour of the
rupee vis-à-vis the dollar have an impact on the software targets set
by Nasscom, and on India’s competitive advantage as an outsourcing destination?
Nasscom is optimistic that the appreciating rupee would not have a lasting effect.
“The impact would be minuscule and to the tune of 2-3 percent; we do not
think it will have an adverse impact on the competitiveness of Indian software
firms,” says Kiran Karnik, president, Nasscom.
Although it is probably too early to quantify the impact of the yo-yoing rupee
on margins and bottom lines, its volatility is a cause for concern. The future
of Indian software service firms, in addition to the pressures of billing rates,
will also depend on one more crucial factor—how smart the CFO is in predicting
the rupee’s movement.
| WHILE exporters might complain about the depreciating
dollar, importers were grinning. D-Link (which has a manufacturing unit
in India), HCL Infosystems and others were clear beneficiaries as they import
hardware components. The BPO industry also benefited as players such as
Tata Telecom and Hinduja TMT (through its association with Aspect) import
equipment for call centres.
Indian hardware companies generally benefited from
the strengthening rupee in more ways than one. Says C M Gaonkar, director,
Finance, D-Link India, “Raw materials account for about 75 percent
of our expenditure. Out of this, imports account for about 90 percent.”
There are also gains to be had in areas such as reduction in freight and
custom duties. Continues Gaonkar, “Thanks to the appreciating rupee,
the cost of inputs decrease and it helps reduce freight and custom duties.
It also helps during remittances as companies enjoy a credit period of
30-45 days, so they gain in foreign exchange when the rupee appreciates.
Generally, companies look to import components in bulk to maximise their
advantage. Gaonkar is of the opinion that depending on the monthly order
booking position, companies can look to import and take advantage of an
appreciating rupee.
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| Australian Dollar |
26.0% |
| British Pound |
16.0% |
| Euro |
12.0% |
| Japanese Yen |
12.0% |
| Indian Rupee |
8.1% |
| Swiss Franc |
5.5% |
| January 02 - 48.3 |
January 03 - 47.9 |
| February - 48.7 |
February - 47.7 |
| March - 48.7 |
March - 47.6 |
| April - 48.8 |
April - 47.3 |
| May - 49.01 |
May - 46.7 |
| June - 48.9 |
June - 46.5 |
| July - 48.7 |
July - 46.2 |
| August - 48.5 |
August - 45.8 |
| September - 48.4 |
September - 45.7 |
| October - 48.4 |
October - 45.7 |
| November - 48.2 |
November - 45.5 |
| December - 48.05 |
December - 45.5 |
venkatesh@expresscomputeronline.com
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