Further appreciation in rupee could impact profit margins of top IT companies like Infosys

BANGALORE: As they clamber out of a near two-year slump, India's software services exporters may lose the crutch of a weak rupee, which is strengthening against the US dollar on the back of recent central intervention on lending rates and the new-found policy momentum in the country.

Rupee, which rose from 54.8 against the dollar at the beginning of current quarter to 52.9 on Monday, could rally further impacting operating profit margins of India's 3.7 lakh crore ($70 billion) IT export sector by 1%.

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For the top four IT services companies alone, that comes to a hit of at least 100 crore in the March ending quarter.

"Last year's rupee depreciation was a boon for IT firms, but this year, we don't see that cushion," said Sreenivasa Prasanna, senior director at India Ratings, part of Fitch Group, referring to 2012 when rupee had hit a record low of 57.33 against the dollar.

"Clearly, nobody is expecting rupee depreciation from this level."

In 2012, a weak rupee had enabled Indian IT companies to offer to pass on foreign exchange gains as discounts to clients in the US and Europe to encourage them to spend more on technology. Compared to a 17% growth in 2012 financial year, Indian IT sector is expected to close the current financial year with just about an 11% growth.

For IT services exporter sector, which earns close to 60% of its revenue in US Dollar, a 1% rise in rupee typically results in an operating margin decline of 30 to 40 bps. In the December quarter, rupee appreciating by as much as 0.5% had shaved off nearly 20 basis points from Infosys's profit margins. One basis point is one hundredth of a percentage.

The sectoral index of information technology, BSE-IT closed at 6,352 on Monday, down 1.4% from a week ago.

Analysts say that a further appreciation in rupee could impact the profit margins of top IT providers such as Infosys, and Wipro that have been have been struggling to match industry growth rates due to weak demand for IT outsourcing services and overall slowdown in the United States and Europe.

On the brighter side, while rupee is appreciating against dollar, exchange rate between other currencies such as British pound, Euro and Australian dollar may help the IT companies offset part of the negative impact, according to Abhishek Shindadkar, research analyst at ICICI Securities.

While announcing December quarter earnings in January, Infosys CFO Rajiv Bansal had said that he expected the local currency to remain under pressure until India is able to better manage its current account and fiscal deficits. Bansal was not available for comment at the time of going to the press.

Last week, the rupee had hit a three-month high of 52.93 against the dollar after the Reserve Bank of India cut its interest rates and the cash reserve ratio to enable banks to lend more. The central bank had also lowered its policy lending rate for the first time in nine months, to 7.75% from 8.00%.

According to India Forex Advisors, the ongoing appreciation of rupee is primarily due to dollar inflows from foreign institutional investors into the Indian market. The foreign funds are estimated to have bought more than $4.5 billion worth of shares and debt in January, according to them.