The depreciating rupee is impacting potential upcoming IT contracts and could impact onsite costs and international hiring plans.
With the rupee down, industry watchers say that outsourcers in the US are starting to renegotiate the terms of some of the potential renewable contracts. The rupee today hit a record low of 54.91 to the dollar.
Onsite staff expenses
Another impact of the sliding rupee is being felt on expenses incurred on onsite employees (such as travel and stay) and hiring local talent in the US and Europe. “Costs of stay, air travel and even hiring in these geographies will get expensive,” said Mr Sanjoy Sen, Senior Director, Deloitte. Infosys said that it plans to hire 1,200 people in the US.
“The rupee slide has started renegotiations from some potential IT contracts in the US and Europe as outsourcers opine that they can get reduced rates for their contracts,” said Mr Sen. Analysts also did not rule out the possibility of existing contracts being renegotiated for lower rates.
In the fourth quarter results, Mr Ashok Vemuri, Board member and head of Americas and Global Head of Manufacturing and Engineering Services Verticals, Infosys, told Business Line that companies are increasingly starting to look at shorter contracts and looking at evaluating contract terms every few months.
According to Mr Peter Schumacher, CEO of Value Leadership Group, competitive intensity and risks in the IT services industry are increasing dramatically and outsourcers are looking at every possible way to cut costs. The rupee volatility has affected some of the Indian IT firms.
TCS, for example, incurred a year-on-year loss of 1.3 per cent.
Mr Vasanth Krishnan, Chief Financial Officer, Mahindra Satyam, said: “We lost Rs 60 crore because of forex fluctuations in the fourth quarter ended March 31, 2012.” In the comparable quarter last year, it made a gain of Rs 18 crore and in the third quarter in 2011-12, it made a gain of Rs 67 crore. For the full year, it gained Rs 64 crore.
Hedging strategies
Due to this increasing volatility, some companies such as TCS and Infosys have changed their hedging strategies. Infosys, for example, now hedges for two quarters and TCS discontinued its long-term hedging strategies recently. A one per cent depreciation of the rupee aids margins of IT companies by 30-40 basis points.
While there are immediate benefits due to the depreciating rupee on the bottomlines of IT companies, analysts feel that benefits from these gains will be ploughed back into the business in the form of sales and marketing expenses.
“Benefits from rupee depreciation will be retained by the IT companies and will be reinvested into the business,” said Ms Ankita Somani, Research Analyst-IT and Telecom, Angel Broking. Infosys has $80 million in hedges, TCS has $1.3 billion and as on December, Wipro hedged $1.8 billion.