USD-INR, IT Sector, Metal Sector, HDIL

USD-INR, IT Sector, Metal Sector, HDIL

Sliding INR

Sliding INR

Rupee rises 4.9% during current week

Rupee completed the biggest weekly gain in 13 years on hopes that Prime Minister Manmohan Singh, will revive efforts to sell public sector companies to attract foreign investment. The rupee advanced 4.9% this week, the most since March 1996, to close at 47.125 per dollar. The rally took gains this month to 6.5%, the best performance among the 10 most-active Asian currencies. The currency climbed to a 5 months high as Sensex this week rallied the most since 1992. The Government will sell stakes in companies as promised by the Congress party in its election manifesto, former finance minister Palaniappan Chidambaram, quoted as saying on May 18. The new administration, to be sworn in today, may start by resuming share sale plans for electricity producer NHPC Ltd., explorer Oil India Ltd. and fuel retailer Hindustan Petroleum Corp., according to Mumbai-based brokerage Religare Capital Markets Ltd. FIIs increased share purchases than they sold by US$1.1bn on May 19, the most since June 2007, taking the net this month to US$3bn. Sensex jumped 14.1% this week. India’s "modest" dependence on exports will help the economy weather the global recession and recover this year, reducing the need for further stimulus, central bank Governor Duvvuri Subbarao said today. Asia’s third-biggest economy expanded at the slowest pace since 2003 in the quarter ended Dec. 31. Offshore contracts indicate that the rupee will trade at 47.22 to the dollar in a month, compared with expectations for a rate of 49.70 at the end of last week. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the rupee.

Rupee rises

Ends at 47.37/38 per dollar

Rupee rose back towards its 2009 high on Thursday, bolstered by broad weakness in the dollar and expectations of a jump in foreign investment after the ruling coalition won national elections.

Rupee ended at 47.37/38 per dollar, off an early peak of 47.28, but still above Wednesday's close of 47.47/48.

Rupee trims losses

Ends at 46.42/43

Rupee trimmed losses to close at the day's high on Thursday helped by dollar selling by the central bank and a recovery in the local share market, which slumped more than 5 percent in early trade.

Rupee ended at 46.42/43 per dollar, still 0.2 percent weaker than 46.33/35 at close on Wednesday. On Tuesday, it fell to 46.99, its lowest since July 2006, according to Reuters data.

Rupee on a downslide

The spot rupee today reached a fresh 13-month, intra-day low of 43.20 against the dollar following heavy buying of the US currency by oil companies and by banks for non-deliverable forward (NDF) market arbitrage.

The rupee, however, recovered to close stronger at 42.97 following selling of dollars by the Reserve Bank of India (RBI) as a part of the indirect intervention to stem the rupee depreciation, dealers said. Since the beginning of the month, the rupee has lost almost 7.5 per cent from 40.00 to a dollar to 42.96.

RBI had last sold dollars before the announcement of the annual monetary policy on April 29, 2008, to keep the rupee in the range of 39.90-40.00 to a dollar. "But for the selling of dollars by nationalised banks on behalf of the central bank to the tune of around $500-750 million, the rupee would have easily breached 43.30-43.40 to a dollar," said a dealer.

Dealers added that the selling happened around 43.20 in the spot dollar market and there was not much sales in the forward market.

"This is one of the reasons for the enhanced liquidity in the market, which is evident through a rise in reverse repo bids from around Rs 20,000 crore last week to Rs 36,000 crore on Thursday," said a dealer.

Since crude oil prices reached a high of nearly $136 a barrel in the international markets, the rupee opened weaker at 42.98-43 after closing on Wednesday at 42.85-86 to a dollar. The outlook on the Indian economy has been benign and there are no fresh inflows, while the demand has led importers, both oil and non-oil, to buy dollars aggressively, a dealer of a private bank said.

NDF is the derivatives market, where foreign investors take a position on the rupee-dollar exchange rate in the overseas market.

At present, the view on the rupee is bearish, which may lead to the purchase of dollars in the local market to be invested overseas. These markets mostly operate in Singapore and Hong Kong and banks or companies with active subsidiaries or branches in these countries play in the market.

Banks in India are buying dollars cheaper by 3-4 paise in the one- or two-month forward to sell it at a higher spread in the overseas market and earn profit.

Following a panic buying of dollars by oil companies, which preferred to book long-term contracts rather than the short-term ones, the annualised premia for the six-month and one-year forward dollars closed higher at 1.89 per cent and 1.39 per cent against 1.71 per cent and 1.30 per cent on Wednesday.

Rupee hits 13 month low

The Indian rupee fell to a 13-month low as public sector oil companies continued to buy dollars to pay for crude oil, which surged to a new all-time high above US$127 per barrel. Also, data showing inflation touching a new three and a half year high heightened worries about slowing economic growth amid record oil prices and slowing foreign capital inflows.

The rupee lost 2.2% during the week to close at 42.5075 a dollar, adding to last week's 2.3% fall. It earlier dropped to 42.92, the lowest intraday level since April 12, 2007. But, it recovered some ground on speculation that the Government will ease curbs on overseas borrowings, allowing more capital inflows. At its low of the day, the rupee was down 8.2% in 2008. It had risen more than 12% against the dollar in 2007. The currency's near 8% decline this year is the third-worst performance among the 10 most-traded Asian currencies after the South Korean won and the Thai baht.

Government data showed annual inflation at 7.83% for the week ended May 3, while provisional inflation rate for the week ended March 8 was revised up to 7.78% from 5.92%. Earlier this week, data showed that the annual pace of growth in industrial production more than halved to 3% in March from 8.6% in the previous month. The gain was the smallest since February 2002.

Crude oil, India's biggest import, hit record highs near US$127 a barrel this week, raising the risk of the trade deficit widening. Moreover, FIIs have sold Indian equities worth US$2.9bn this year, a sharp turnaround from record net purchases of US$17.4bn last year.

On a trailing 12-month basis, the current account deficit - excluding remittances and trade deficit - remain high at around 4.5% and 7.2% of GDP, respectively, says Morgan Stanley. Higher oil prices will likely add further to the trade deficit, the US brokerage adds. The rupee may fall by 5-7% against the US dollar by the end of 2008, dragged down by a slew of factors such as a widening trade deficit, and soaring oil and commodity prices, Morgan Stanley said in a note.

Rupee falls to 5 month low

Ends at 40.39/40

Rupee dropped to its lowest level in five months on Monday as a sell-off in the stock markets heightened fears of capital outflows, while January trade data showed the deficit more than tripling from a year ago.

Rupee ended at 40.39/40, its lowest finish since Sept. 18, and down 1 percent from Friday's close of 40.01/02. It was the biggest single-day percentage fall in four months. The rupee has fallen more than 2 percent so far in 2008.

Modulate FII inflows to stem rupee appreciation

PHD Chamber has called for fine tuning the policy relating to Foreign Institutional Investors (FIIs) to insulate the economy from extreme speculative swings and concomitant distortions in the economy.

This radical suggestion of the Chamber has come at a time, when FIIs exposures in the country has reached high proportions and the perceived view that such inflows are causing, to a very great extent, rupee appreciation against major currencies, particularly the greenback.

"We are not against FII inflow into the country, which is a barometer of the degree of maturity of the economy. But when there is a huge jump - US$22bn during April-November 2007 as against US$3.8bn in the corresponding period last year-we have to sit up and take stock of the situation. Such an exercise is not meant for putting stumbling blocs on the inflow but to gauge the quality of inflows to discern how much has been channelized to productive sectors," says Dr L K Malhotra, President, PHD Chamber.

According to PHD Chamber three pivotal segments of the industry-textiles, information technology and gems and jewellery -are reeling under heavy pressure on account of rupee appreciation since these industries’ fortunes are directly linked to exports.

Soon the negative spin-offs of the rupee appreciation would affect other segments as well. The common perception that rupee appreciation would lead to easing of cost of imports and help the domestic industry is an overstated fact in the long run. A holistic view has to be taken in such circumstances. Weak dollar or Euro would lead to surge in imports of goods at reduced prices, which can erode the price competitiveness of the domestic industry.

Dr Malhotra said that the Chamber has catalogued a few case studies, where the project reports for the Greenfield projects have gone haywire on account of the rupee appreciation. These projects were drawn up on the basis of a stable or slightly appreciating rupee.

"But on the ground, we are having a steadily appreciating rupee, a higher interest rate regime and a plethora of infrastructure bottlenecks, which can square off the marginal benefits on imports on account of rupee appreciation and can erode the price competitiveness of the goods in the domestic market," says Dr Malhotra.

PHD Chamber feels that the perceived looming recession in the US and slowdown in the growth rates in the manufacturing sectors in Europe coupled with recent steps that are taken or are being contemplated by these countries to curb the hedge funds’ operation in the aftermath of sub prime mortgage crisis in US, would compel many FIIs to park their funds in India for a safe return. This might lead to further firming up of rupee.

The Chamber feels that there are ways in which the FII flows into the country can be modulated, without pressing the panic button. These include a minimum lock in period, say for one year and more imaginative policies to check the inflow through Participatory Note (PN) route. "The recent high level meeting called by SEBI has discussed these issues threadbare and some positive decisions should be put in place as early as possible," adds Dr Malhotra.

PHD Chamber said that there is a worldwide consensus for modulating the capital flows. European countries are inclined towards imposition of additional taxes for capital flows and compulsory registration of hedge funds. Some Governments have already imposed the additional taxes-known as Tobin Tax, (named after Robert Tobin who propounded the tax). "India also has to think in that direction, sooner or later," says Dr Malhotra.

BPO, mid-size companies to be strongly hit by Re impact

The country''s BPO sector will continue to face the brunt of the appreciating rupee which will hit margins by 0.2-0.5 per cent in the coming quarters, top industry players today said. ''''BPO and small companies are likely to bear the brunt of rise in rupee in comparison to bigger software firms as they are working on strategies and have additional levers to reduce the impact on profitability,'''' Nasscom Chairman and Cognizant Technology Solutions Vice Chairman Lakshmi Narayan said.

To help offset the impact, government should extend the STPI scheme to such companies just like other export oriented units, he added. The industry is continuously evaluating the impact of the rising rupee, outgoing Nasscom chief Kiran Karnik said, adding that there is no impact on Indian IT companies topline but for every one per cent change in rupee there is 20-25 basis points (bps) change in profitability. ''''The BPO industry will be strongly hit,'''' he added. The bigger companies are managing to offset the rupee impact through their operational efficiency and gain in supply, Kanrnik said. The supply side is improving and there will be a moderation in the wage structure from next year which in turn will help improve the situation, he added. ''''The government have been very supportive and has played a active role in taking IT industry to heights,'''' newly appointed Nasscom chief Som Mittal said, adding that India will become a knowledge capital of the world.

Rupee hits new high

The rupee on Thursday ended at a new nine and half year high of 39.49/50 versus the greenback, stronger by 8.50 paise from previous close of 39.5750/5850 on the back of consistent portfolio inflows and in the absence of any major dollar demand as well as weak Asian stocks.

In continued volatile trade at the Interbank Foreign Exchange (forex) market, the local currency resumed marginally lower at 39.58/60 a dollar and later fluctuated in a range of 39.3550 and 39.6350 during the day.

Earlier, the rupee ruled around this levels, when it closed at 39.65 a dollar on April 14, 1998 and at 39.40 a dollar on April 8, 1998.

Influenced by stock market activity, the rupee moved widely during the day even as the Reserve Bank of India (RBI) made a feeble attempt to contain the rupee's surge by making dollar purchases in favour of exporters, forex dealers said.

Foreign Institutional Investors (FIIs), which have poured in more than $4 billion in equity since September 19, remained heavy buyers in shares and supported the rupee sentiment, commented a banker.

Rupee and the IT sector

The hardening rupee has been one of the major focal points of the IT industry of late. A 10% appreciation in the last one year has made a serious dent on the global competitiveness of the Indian IT sector.

Apprehensions that some segments of the IT/BPO business may be flying out of India has made the industry bigwigs somewhat nervous.

In a bid to combat their growing concerns about the rupee appreciation, some of the industry leaders have even called for slowing down the rate of salary hike in the sector, and of course as expected, others have reiterated their right to peg the salaries wherever they wish. Free market, etc. Thus increasingly, there is a tacit expectation, if not a strident demand, from the sector that the government should manage the appreciation of the rupee better. Never mind its impact on inflation and interest rates.

Well, no harm in having one’s expectations and hopes and sending some gentle signals along those lines. But even as those gentle signals are finding their audience, there are certain aspects of the issue everybody connected should take note of.

From a mere 5% of a $33 billion total Indian exports in 1996-97, today (2006-07) the IT sector accounts for a hefty 25% of the $120 billion total exports from India. This represents a compounded annual growth of 35% for the IT sector over a 10-year period, making IT the fastest growing and the biggest export-oriented sector in the country. Clearly then, if the rupee is getting steadily stronger, the Indian IT sector has had a strong hand in making it so! In short, the IT sector has become a victim of its own success.

After all, if the IT exports rode on a historically weak rupee, it is only natural that in due course, the forces of international markets will bring about a correction. That’s international territory in the financial markets.

That is how industries and nations grow up and learn to cope, as well as find, develop or invent other strengths to stay afloat in a competitive market. And the Indian IT sector can be no exception to this standard rule. It only stands to reason that after decades of reigning strong, the hardest currencies of yesteryears like the US dollar, the Deutsche mark, the pound sterling, the yen or the French franc give way to currencies of the emerging economies.

There was a time when the Japanese automakers faced the same problem as the Indian IT sector today, only much worse — namely that of a super hard yen. Their companies would struggle to spend millions in R&D for devising a superior carburettor design that would bring the cost of a car down by $85, only to see a strong yen push the car price up by $300 the next morning. But the Japanese auto industry learnt to cope. That’s when they unleashed their Lexuses, Accuras and Infinities into the western world.

Clearly, our IT sector needs to find similar market solutions, rather than seriously expect or hope for a government handholding. You either have a free market or you do not. The sector will have to reduce its dependence on conventional export markets; tap hitherto untapped markets, say, among the rapidly emerging east European countries; negotiate their contracts in rupee rather than dollars; get a lot more India-centric; move up the value chain; draw in work-force from the fringe states to bring about superior wage arbitrage and do a whole lot of other things so that the sector is driven more by quality and value than by the softness of the rupee.

To illustrate one of the above points, let us see how our IT sector can become more India-centric. Take Cambodia. For tourists visiting Cambodia, the visa is on arrival. And the software and the system installed at the beautiful Siem Reap airport is so advanced that visas for an entire plane load of tourists is cleared in 15 minutes flat. IT is on its best display here, including the computers on the immigration desk taking your picture on the spot. The same is true of the passes issued as you enter Angkor Vat. The column of vehicles at the entry gate moves faster than our vehicles do at most of our Toll Gates.

During the few seconds a car stops at the entry to Angkor Vat, the tourist’s picture is taken and the laminated pass issued for one or three days as required, complete with his or her picture and other details, such as, name, date, time, etc. Don’t we have enough and more scope in our own country for our IT sector to address, without worrying excessively about exports? We are a big enough country to do much of our ‘exports’ out of Bangalore and Hyderabad to a couple of dozen of states within the country.

Re ends strong on stock market rise

The rupee reversed early losses and crept higher on Tuesday as a strong rise in local stocks raised hopes that foreign capital inflows will hold up in coming months despite global credit market problems.

Investors also bought the rupee on expectations the US Federal Reserve would cut its federal funds rate by at least 25 basis points later in the day.

The partially convertible rupee ended at 40.48/49 per dollar, up nearly half a percent from the day's low of 40.65 and above 40.56/57 at Monday's close.

"Indian shares closed much stronger than their Asian counterparts, and that took the dollar bulls by surprise," said V. Rajagopal, head of FX trading at Kotak Mahindra Bank.

"There was a good chunk of inflows above the 40.55 per dollar mark," he said.

Indian shares rose 1.06 per cent on Tuesday to their highest close since late July, while most markets elsewhere in Asia fell on fears credit market problems were spreading.

Foreign funds have bought about $1.1 billion of Indian stocks so far this month after selling about $1.9 billion last month, taking their net investment to nearly $9.5 billion in 2007.

A U.S. rate cut would widen India's 250 basis point rate premium. The could attract more foreign interest in the rupee, which hit a nine-year high of 40.20 in July and has risen more against the dollar than any other Asian currency this year.

Some analysts expect the rupee to open around the 40.40 per dollar on Wednesday if the Fed cuts rates by 25 basis points, but likely central bank intervention may check steep gains.

The Reserve Bank bought more than $38 billion in the first seven months of 2007 trying to rein in the rupee's rapid rise.

Rising rupee, interest rates affecting biz sentiments: FICCI

Notwithstanding a good monsoon that portends well for rural demand, the other two key drivers of the economy -- exports and investments - are showing signs of moderation as a result of successive rise in interest rates and appreciating rupee, industry body FICCI said on Sunday.

"The adverse impact of rising interest rates and appreciating rupee has engulfed many more sectors and many more firms," FICCI said in its Business Confidence survey.

The chamber said the assessment made by the participating companies about industry and firm-level performance shows that the industry is in the midst of a moderate slowdown.

Pointing out that a rising rupee and hikes in interest rates have affected the sentiments at ground level, the survey revealed that industrial growth was a matter of concern. "Unless we take actions to reverse this situation we may face a situation of slowdown in growth," it said.

The Indian currency has risen more than 10 per cent against the US dollar in the past one year, while the Reserve Bank has raised key interest rates six times in the past two years to cool inflation.

Of the participating companies, 58 per cent respondents reported that their current industry performance is 'moderately to substantially' better vis-a-vis last six months. In the last survey, 68 per cent had reported likewise.

With regard to firm level performance, 64 per cent of the companies reported current performance was 'moderately to substantially' as compared to 73 per cent in the last survey.

As a result of the weakening performance both at the industry and at the firm level, the Current Conditions Index computed by the chamber has nosedived from 70.4 in the last survey to 65.0 in the present survey.

However, on expectations regarding performance during the next six months, the survey revealed that respondent's outlook for the economy has improved as compared to last survey. The results related to expected performance at the industry and firm level were similar to the results obtained earlier.

The survey revealed that demand condition in the economy was weakening. Nearly 30 per cent of the companies have reported 'weak demand' as a constraining factor.

"Certain segments of the industry have been forced to cut down on production in the wake of weak demand," it said. In the last survey, 72 per cent of the participating companies had reported a capacity utilisation level of more than 75 per cent, which has come down to 60 per cent.

While the outlook for investments and exports have taken a hit, some moderation in terms of expectations regarding profits and employment over the next six months is also visible, the survey said, adding services sector have emerged as the most apprehensive about its near term performance.

In case of services, 59 per cent of respondents reported 'moderately to substantially' better performance as against 75 per cent in the last survey, while in heavy industry the figure has come down to 57 per cent in the current survey as compared to 66 per cent in the last survey.

As regards performance over the next six months, while 80 per cent of the respondents from services sector were optimistic about their performance during third quarter of 2006-07, this proportion fell to 67 per cent in quarter four 2006-07 and has further come down to 59 per cent in the current survey.

India Knowledge: Two sides of a rising rupee

India’s rupee, which once traded for 47 or 48 to the US dollar, has been rising rapidly. It now stands at 40 to the US dollar. As a result, the revenues of India’s exporters—which include IT firms such as Infosys, Wipro and TCS—have been affected and earnings have been squeezed. At the same time, though, consumers are benefiting from cheaper imports. How should India manage this trade-off?
According to Wharton finance professor Jeremy Siegel, although Indian firms will need to watch their export costs more carefully, the 10% to 15% savings on imports should be passed along to consumers. “My feeling is that India should not move against this,” Siegel said in a recent interview. “The exporters have had it really good. Let’s give the Indian consumer a break and continue to make sure that the exporters are going to have to stay on their toes as far as competitiveness is concerned.”
Despite the pain to exporters, currency appreciation can curb foreign capital inflows which can have a crippling effect on markets in the long term. “By letting (the currency) appreciate, people are a little bit more cautious,” Siegel said, citing the era of fixed exchange rates in Thailand, Taiwan, Indonesia and the Philippines that precipitated a crisis in 1997. “All of the capital that came in—they couldn’t deploy it favourably, and the result was over-consumption, deficits and then finally devaluation.”
According to Siegel, balanced economic growth “requires not just pushing exports, but also developing your middle class. And you develop your middle class by passing on some of those price gains that you get through strong currency, to lower their cost of living.”
Pre-announcing vs a surprise unveiling
When it comes to rolling out new goods and services, companies tend to choose one of two strategies as a way of generating interest in their products, whether it’s Apple’s iPhone or Microsoft’s latest operating system. One is pre-announcing the product to give customers, partners and even competitors advance notice of what’s to come. The second approach is the surprise unveiling, where a company hopes to make a big splash by giving few hints about an upcoming release. Which approach is better?
“It’s not a clear-cut situation,” says Wharton marketing professor Jehoshua Eliashberg. “What matters more is a company’s position in an industry. If a company is a dominant monopolist, it has reason to pre-announce because it doesn’t fear a competitive reaction. If the company is smaller, the negatives of announcing a product early outnumber the positives.”

Rupee Impact

It’s yet another earnings season and the appreciating rupee seems to have cast its long shadow over many companies—especially those that are heavily dependent on export revenues.

But how serious could the problem be in the long term? The general reaction seems to be uniformly pessimistic. Equity analysts have been busy cutting profit projections for software and pharmaceutical firms, and the early quarterly results show definite cause for concern. Business lobbies have sent dark warnings to the government about how small garment and textile exporters are headed for deep trouble. And the government is in the process of providing some fiscal sops to exporters hit by the rising rupee. Meanwhile, to provide a more optimistic view, economists are wondering whether a strong currency will actually bring down domestic inflation.

There is a common thread in these expectations—the assumption that a strong rupee will have a deflationary impact on Indian companies. Export revenues (and hence total revenues) in terms of rupees will be lower than expected. And cheaper imports will restrict the ability of companies to raise the prices of the stuff they sell. In other words, a strong rupee will hinder growth and help curb inflation.

These assumptions are well within the traditional debates on the impact of currency movements on the real economy of output and prices. But, are there other possibilities? By focusing exclusively on the deflationary effects, the current debate has ignored the other possibility—that a strong currency can, in certain cases, dramatically help certain companies (though with a lot of attendant risks).

The trick is to look not just at the revenue statements of companies, but also at their balance sheets. Many large companies that have borrowed money abroad in recent years are likely to benefit from the strong rupee. The value of their foreign debt in rupee terms will drop because of a sustained rise in the value of the Indian currency, helping lower capital costs.

Indian balance sheets have become increasingly globalized over this decade, as rising foreign exchange reserves have emboldened the government and the Reserve Bank of India (RBI) to allow domestic companies to borrow and buy abroad. A lot of fawning attention has been paid to this globalization on the asset side. International acquisitions make for good headlines and feed nationalist pride.

But an equally dramatic dose of globalization is evident on the liabilities side, too. Indian companies have borrowed billions of dollars over the past few years, through external commercial borrowings and convertible bonds. Much of this has been contracted in dollars—and has to be repaid in that currency. The value of this debt in rupee terms will drop as the Indian currency appreciates—companies will need fewer rupees to repay it.

This means the rise of the rupee will lead to significant savings for companies that have piles of foreign debt in their balance sheets. But rather perversely, it is the companies that have been on a global borrowing binge that will gain in comparison to those that have little debt on their books. Financial adventurism will pay more than financial prudence—at least till the next global financial earthquake shakes the adventurers out of their comfort.
Yet, till then, it would be interesting to see whether gains on the balance sheets of Indian companies more than cancel out the losses that will pop up in the revenue statements. Only then will we know for sure whether the negative effects of a strong rupee are as serious as currently assumed.

Does this seem far-fetched?

Look at what happened in East Asia in 1997 to see a mirror image of today’s dilemmas in India. Stable currencies and premature capital account convertibility in the early 1990s acted as an incentive for companies in the region to rush abroad to borrow at low interest rates. This cheap money was used to finance domestic investments. By the middle of 1997, many of the biggest companies in the region had warped balance sheets—with assets in local currencies being funded with dollar liabilities. They were sitting ducks in the event of a currency crisis.

And that’s precisely what happened. The sudden and sharp drop in regional currencies 10 years ago tore these balance sheets to tatters. The devaluation of Asian currencies thus led to an investment crunch and worsened the macroeconomic crisis. In other words, Asia in 1997 is almost a mirror image of India in 2007. The question is: Will currency appreciation have positive balance sheet effects just as currency depreciations had negative effects 10 years ago?

In other words, the situation is far more complicated than commonly assumed. It will be interesting to see how currency appreciation works itself through corporate revenues and balance sheets in India in the quarters ahead. In fact, a further rise in the rupee could pay large Indian companies a huge dividend at the cost of global banks and bond investors.

Indian Rupee hits IT Companies

Ramesh Mahendroo is a worried man these days. CEO of a small software company in Noida, he billed his US client $700,000 (Rs 3.09 crore) in March, 2007. But at the end of the 60 day payment cycle, the US client sent only Rs 2.8 crore. Mr Mahendroo had lost almost Rs 29 lakh and he could not utter a word.

Mr Mahendroo is not alone. By the time, the payment arrives, its short by several lakhs or even a few crores leaving the IT and BPO companies cash strapped to pay employees and manage overheads. To avert it most BPOs and IT firms, are renegotiating contracts and putting in clauses according to which the billing rate per hour will go up by some basis points if the rupee falls below a certain threshold and vice versa. Some are also negotiating shorter payment cycles.

And the story is not limited to small IT companies and BPOs. Even large ones are facing the heat. According to Credit Suisse, Infosys Technologies may miss its rupee sales guidance this time due to a hit from the rising rupee. According to Merill Lynch there will be a decline of about 330 basis points (3.3%) in operating margins of IT companies, this quarter due to the rise in rupee and wage hikes this quarter.

“We have asked our sales people to go back to all dollar denominated contracts and look for ways of renegotiation. We expect the rupee to fall a bit in winter months when the demand for oil goes up especially as OPEC has refused to increase production. Nevertheless, we are not taking any chances,” said KS Ananthanarayanan, CFO of Birlasoft, a mid sized IT firm.

BPOs are also trying to minimise the loss. “Most BPOs are putting together clauses according to which the billing rate per hour will go up a certain basis points if the rupee falls below a certain threshold. Vice versa, the billing rate will go down if the rupee falls, though it’s an unlikely scenario,” says Manoj Malhotra, CEO of Thapar Group owned Salient BPO in Gurgaon.

“Nobody is working at older billing rates especially in this scenario of rupee rise. In most of our contracts, we are having the renegotiation clause built in,” says Zenta BPO country manager Jaswinder Ghumman. According to analysts, another way to negate the rupee rise is to spread to other geographies. “The Filipino peso has also appreciated against the dollar but not as much as the rupee. So, BPOs and IT firms having a play there can swiftly shift capacities and negate their forex impact,” says Gartner research director TJ Singh.

Most small IT and BPO companies with 100-200 seat operations don’t have a separate treasury department. Many, however, do hedge. Still, the rapid rise of the rupee against the greenback has left their finances in the disarray.

“A Re 1 change in the dollar, impacts our margins by about 0.3% but we have some natural hedges in terms of revenues and costs in dollars and pounds,” says Firstsource CEO Ananda Mukerji.

The rupee neared its nine year peak last week when it hit a peak of 40.39 on Thursday before closing at 40.52. The rupee has risen from 44.2 since January 1 this year to a 40.40 as of Monday. The rupee was trading at 46.06 in July of 2006. The hit due to rupee rise will be evident in the first quarter results to be announced this month by IT majors.
According to a study done by a BPO focused portal, 60% of small BPOs in India shut down within months of starting operations.
According to an analysis, the profit margins of about 22-25% in IT companies is almost being negated. The rupee has gained about 17%. MAT has been levied at 11.33%. FBT on ESOPs is being levied at 33.33%. Salaries are rising at a rate of 15%. And service tax on leases has been levied at 12.5%. Add to that the impending end of tax sops in 2009 and the woes of IT industry become even worse. Meanwhile, people like Mr Mahendroo have no recourse but to optimise processes and renegotiate contracts with clients to prevent foreclosure.

Rising rupee pricks small exporters

Anand Khushwaha, a small Delhi-based exporter of imitation jewellry, has been inundated by e-mails from his customers in the United States and Europe. Most carry the same message: since he has raised prices up by 20 per cent, orders have been placed with cheaper exporters in China. Business is down 50 per cent for Friends International, Khushwaha’s firm.

Last year, it had done exports of Rs 25 lakh. “In the first three months of this financial year (April-June 2007-08), we have got orders of just Rs 5 lakh. We will be lucky to do Rs 15 lakh for the whole year,” said he.

Not far from Khushwaha’s office, Prince Malik runs a small outfit exporting home furnishings. At a recent exhibition in Hong Kong, he realised that he was hopelessly out-priced by rivals from other South Asian countries. Last year, he had come back from the same exhibition with orders of over $200,000.

“This year, it hasn’t gone beyond $50,000,” he said, putting the blame on the 15 per cent hike in his prices, thanks to the appreciation of the rupee against the dollar.

Small exporters like Khushwaha and Malik are the first casualty of the rising rupee which has gained over around eight per cent in the last three months and 11.6 per cent in the last one year. Unlike large exporters, they have no financial reserves to fall back on. And as they use locally-produced raw material, they do not benefit from imports becoming cheaper with the rise in the rupee. As a result, these exporters have been left with no option but to raise their prices. The consequences have been disastrous, a number of small exporters told Business Standard.

“If the rupee keeps on strengthening, I see at least 30 to 40 textile units closing down in the next six months in the apparel sector,” said Vijay Agarwal, chairman, Apparel Export Promotion Council. “Most of them will have to close their business if the rupee does not weaken,” added Rita Nahata, secretary, Society for Small and Medium Exporters.

Their numbers, to be sure, are huge. Commerce ministry officials said there were more than 1,00,000 exporters in the country – most of them are small with a turnover of less than Rs 1 crore. Data also suggests that small firms account for almost 70 per cent of the exports in some sectors like leather, sports goods and woollen products.

On its part, the commerce ministry had promised to cushion the losses of exporters by cutting the premium charges by the Export Credit Guarantee

Corporation, enhancing the DEPB and duty drawback rates and making exchange earners foreign currency (EEFC) accounts interest bearing.

Still, the exporters feel there is a tough battle ahead. “A majority of the small exporters do not have an EEFC account and are not eligible for DEPB and drawbacks on the products that they export. Relief will come only when the rupee weakens,” said Kolkata-based exporter Diptosh Bose.

By all accounts, the export target of $160 billion for 2007-08 looks like a daunting task.

Via Business Standard

Rupee Impact on IT Services

Bear Stearns analysts are assuming the following impact of rupee rise

For every 1% rise in rupee, operating margins have to be trimmed as shown below

# Infosys: trims operating margins 50 basis points.
# Wipro: 35 basis points.
# Satyam: 30 basis points.
# Cognizant: 20 basis points.
# Sapient: <15 basis points.
# Accenture <5 basis points.

So, with a rupee rise of over 10%, Infy's margins could take a hit of 5%

Rising rupee and IT stocks

What will be the stock market impact of the recent sharp appreciation of the rupee? Will the currency’s strong gains provide additional momentum to any generalised de-rating of stocks caused by, say, a global move away from emerging markets?

This has been a key concern with the rupee rising notably from around 46/47 levels against the dollar last July/August to its current level around 41. This analysis focuses listed, export-oriented companies, in particular, the IT sector, what with its heavy export bias and the weights/influence IT companies have on the overall market indices and investment sentiment.

Benign impact so far

Going by historical evidence, further upward movements in the rupee’s exchange rate will have no adverse impact on the overall stock market performance of the IT sector. To that extent, developments in the currency market may not provide a an impetus to any generalised withdrawal by global investors from “risky” emerging markets. (Actually, purely from a currency point of view, any sharp appreciation in the rupee would be even more welcome for that category of foreign investors for whom investment in the Indian securities market is more a play on the “undervalued” Indian currency rather than taking an exposure in “mainstream” companies. The focus here, though, is on what impact the rising rupee value has on the company earnings/margins and how that, in turn, will impact stock market performance.)

An analysis of the statistics relating to the IT sector’s stock market performance (mirrored by the CNX-IT index, which accounts for as much as 90 per cent of the market capitalisation and traded values of the listed IT sector) in relation to the changes in the exchange rate of the rupee over the past five years points to this inference. If the foreign exchange exposure of the IT sector can be expressed in terms of the extent to which the stock market value (of the sector) changes in relation to a certain change in the level of the rupee’s exchange rate, it can be inferred that the level of FX exposure of the sector is quite low.

In statistical terms, it has been noticed that the IT index’s value changes only by around 0.30 times the change in the rupee’s value.

And this measure of the relationship between the two data sets — the regression co-efficient — is also not statistically significant at the 1 per cent level of significance. In other words, one can be 99 per cent confident that the IT index’s value does not change by more than 0.30 times the change in the value of the rupee. Not surprisingly, given the above data, the changes in the rupee explain only around 0.15 per cent of the change in the value of the index in the above period.

exports do well

What has perhaps provided the foundation for IT stocks’ relative insensitivity to the secular upward trend noticed in the rupee’s exchange rate in the past five years is the strong performance of IT exports in the same period.

The rupee has appreciated, on average, about 4 per cent a year in the past five years — from 49.05 in June 2002 to its current levels around 40.95/41. Software exports recorded strong growth in the above period — both in dollar and rupee terms. The growth in rupee terms is significant because it implies that the sector has been able to protect its final rupee realisations despite the secular rise in the currency.It is possible that the critical factors that enabled the sector to post good growth in rupee terms are:

Steady rise in export volumes in dollar terms and, more important,

A good level of hedging of the foreign currency receivables exposure.

Also, critically, the cost base of the IT companies/sector appears to have been systematically managed (lowered in relation to, say, income) as it is possible to protect/enhance margins despite higher FX hedging only with simultaneous action on the cost side.

Systematic hedging

Systematic hedging of the operating exposure (reflected in the increasing level of foreign currency receivables) has ensured that the rupee value of the underlying assets of the sector — broadly represented by the level of the index — is kept relatively immune to foreign exchange risk and is able to rise in tandem with the overall market.

As seen in the Table, software exports, which were around Rs 26,300 crore in 2000-01, have risen at a CAGR of around 30 per cent in the period up to 2005-06. In dollar terms, exports have risen almost at the same rate — rising at 31 per cent CAGR, from $5.75 billion in 2000-01 to $23 billion in 2005-06.

The growth in dollar terms has not been very much higher than that in rupee terms. But what is significant here is that the rupee growth rate has almost kept pace with the dollar growth rate. This points to a good level of hedging of the export receivables.

An example proves the point: In 2004-05, for instance, the dollar export figure was $17 billion. In rupee terms, this was around Rs 75,000 crore. This gives an average rupee rate of around Rs 44.10 per dollar. Applying this average rupee rate of 44.10 to the 2005-06 dollar export figure of $23 billion, one gets a rupee value of around Rs 1,01,000 crore. Against that, the actual rupee exports figure was as much as Rs 99,000 crore.

Given that the rupee has posted a secular appreciation in the five-year period mentioned above, the fact that in 2005-06 the export figure in rupee terms was only marginally short of what would have been the case if the same average rupee rate — of 44.10 — had prevailed that year, shows that software companies had broadly hedged their export receivables for 2005-06 at around the 44.10 levels. The same is the case with the other years too.

Overall prospects

Overall, IT stocks could continue to display robust valuations if stock market performance of the past five years and evidence from the sector’s approach to managing business risk is any indication. The larger message for stocks/companies with an export bias is this: Begin implementing appropriate hedging strategies to minimise the level of risk.