Strong rupee spoils software party

BOMBAY/BANGALORE: Indian software service exporters are battling a near-five percent rise in the rupee this year that analysts say could cut profits 15 percent, just as they are struggling to deal with weak prices and growing competition.

The rupee has risen 4.6 percent against the dollar since the start of 2003. This follows a half percentage point gain in 2002 and contrasts with average falls of about five percent each year in the previous 10 years. Some 70 percent of Indian software services exports are to North America.

"A one percent appreciation in the rupee can have a 2.5 to 3.0 percent impact on net profit," said Ajay Mathrani, analyst at Edelweiss Capital. R Ravi, at IDBI Capital Markets, said the impact could be 3.0 to 3.5 percent.

A five percent rise in the rupee, if sustained for the year, would therefore drag profits down around 15 percent for the calendar year if these firms did not take any measures to hedge the gains or improve efficiency.

India's top listed software exporter, Infosys Technologies, estimated the rupee's two percent gain in the first quarter would hit full-year revenue by about one billion rupees ($21.8 million) and knock 450 to 500 million rupees off its bottomline. This would represent a four percent fall in net profit.

Other exporters of software and outsourcing services are also hurting.

"A rise of one percent in the rupee leads to a decline of 30 to 35 basis points in operating margins and is a cause for concern," said V. Srinivas, chief financial officer of Satyam Computer Services Ltd. K.R. Laxminarayana, treasurer at third-largest software exporter Wipro Ltd , said a one percent rise could hit margins by 40 to 50 basis points.

Firms' margins are already under pressure as they raise marketing spending and staff salaries to compete. Many are trying to offset the currency effect by being more efficient and hedging their dollar earnings. "The rising trend would be of concern to all exporters as it impacts competitiveness and hence revenues and margins," said S. Mahalingam, chief financial officer of unlisted Tata Consultancy Services, India's top software services exporter.

"We do not believe anyone expected the extent of gains." The central bank has refused to bow to pressure from industry groups to stop the appreciation, saying this would hurt the wider economy. "One to two percent a year may be a natural trend and we can live with that, but a five percent rise in less than a year is too fast," said Kiran Karnik, president of The National Association of Software and Service Companies.

The benchmark Bombay Stock Exchange information technology index has lost 18.6 percent since the start of 2003, while the key index has gained 28.9 percent.

HEDGING TO THE FORE

The rupee's gains have slowed in recent weeks, following the dollar's bounce against other major currencies. But rising foreign investments in Asia's third-largest economy, are expected to keep the rupee buoyant in the near term.

"We will continue to see a strengthening trend in the rupee, though the pace seems to be slowing down," said Jamal Mecklai, managing director of risk management firm Mecklai Financial. "Frontline software companies have hedged at an average rate of 47 till December, so they would be protected," said Aman Chouhan, analyst at TAIB Securities. Wipro had about $80-$100 million in forward contracts till about a year ago. That figure is now about $150 million.

Satyam started with practically no forward contracts at the start of the year, but has now hedged about $50-60 million.

© Reuters