Is that too much of a good thing? Depreciation of the dollar is emerging as the biggest risk for the Indian software and IT-enabled companies as their exposure in the US currency is more than 80 per cent, says the chairman of a leading IT company.
“A further depreciation of 10 to15 per cent will significantly erode the labour cost arbitrage of Indian companies which is the main business driver, while profit margins are already under pressure due to wage revisions and an increase in visa costs,” he added.
Despite registering a 34.6 per cent growth in profits to Rs 1,070 crore in the first quarter, Infosys Technologies, the darling of Indian and global investors, has lowered its revenue guidance by over six per cent for the current financial year ending (2007-08) from what it projected in April. The IT major has been forced to lower its revenue guidance due to the record 6.2 per cent appreciation of the rupee during the first quarter (April-June), wage revision and higher visa costs. The sharp appreciation squeezed the firm’s operating margin by 3.5 percentage points.
According to Sandeep Shah of ICICI Securities, “besides wage inflation, rupee appreciation is also denting Indian IT companies’ margins. We expect margins to decline going forward.” However, many Indian IT companies may squeeze out a bit ore by banking on efficiency in operations.
“The impact of the rupee appreciation and an expected reduction in the guidance is factored into Indian IT stock prices after the recent downs,” said Kawaljit Saluja, sector analyst with Kotak Institutional Equities. The sharp rupee appreciation during the quarter may lead to IT companies missing their revnue and earning-per-share guidance for the quarter in rupee terms despite strong quarter-on-quarter growth in US dolar terms, he added.
Despite strong quarter-on-quarter growth by Indian IT companies, analysts believe that the operating profit margin may decline between 50 to 260 basis points for Tier I companies such as Infosys, TCS and Wipro. However, the net impact may be mitigated to some extent by extent of gains on hedging in forex transactions.