31 July 2007

The Rise of Rupee - Part 2 - Impact on IT

Part 1 focussed on why the Rupee is appreciating against dollar. As an individual, if I convert $1, I get 40 Rupees instead of 46 Rupees - a loss of 6 Rupees for every dollar. How does the IT industry, having made billions worth of IT contracts, manage this loss?

USA is the #1 client for the top Indian IT companies. With major chunk of software exports going to USA, the Indian IT industry has a huge profit margin when the Rupee is low. Most of the outsourcing contracts for 2007 were based on weak Rupee forecast. Now that the Rupee has appreciated, the quarterly results of many companies didn't look good.

During the June 2007 quarter, the top four software services companies have posted the slowest Year to Year growth in five quarters (28.73 %). To maintain the profit margins, IT companies have come up with few options:

1. Hike billing rates

TCS and Infosys have managed to increase their billing rates by 4-5 per cent. Wipro's onsite and off-shore billing rates have grown by 1-2 per cent. In Satyam's case, the number of clients billing more than $5 million increased to 65 from 57.

2. Shift operations to "other" cost-effective locations

IT and BPO companies will have to minimize their operational costs to maintain their profit margins.Else risk the threat from other emerging countries like Philippines and Eastern Europe.

Infosys Acquires $250-Million Business From Philips For $28 Million. As part of the deal, Infosys will acquire three captive BPO centres of Philips at Chennai, Lodz in Polland, and Bangkok, which employ about 1,400 people.

Or buy Cap Gemini in Europe

The big 5 US consulting companies have already setup shops in different "cost-effective" locations worldwide. Indian IT companies now have to look elsewhere to keep the profit margins. Better late than never. They will not loose outsourcing deals from the West, provided Rupee stays close to 40. They still get a large number of deals to keep the revenue growing.

The real picture will emerge when the US companies realize India is not the #1 cost-effective offshore/outsourcing destination. By 2010 or sooner, a dollar is expected to fetch only 35 Rupees, if not 30.

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