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The challenges in a booming sector

The sharp appreciation of the rupee in relation to the dollar and, to a lesser extent, the euro, the pound and the yen has naturally affected the booming software exports and the BPO industry. An analysis of the recently released first quarter (April-June 2007) results of the top four information technology (IT) companies — Infosys, TCS, Wipro, and Satyam — is noteworthy for at least two reasons. First, it shows how these companies fared at a time the dollar lo st more than 7 per cent in rupee terms. Secondly, it provides insights into how they might cope with a dearer rupee over the medium term. It needs to be stressed that the financial performance of these companies continues to be impressive, although it may not have matched the lofty standards the share market has routinely come to expect of them. These four companies account for more than 40 per cent of receipts from software exports that totalled over $29 billion in 2006-07. For the domestic stock markets the relevance of these companies can hardly be overstated. A company such as Infosys counts not only in an evaluation of other IT stocks but also in deciding the behaviour of the stock market as a whole. Unlike merchandise exporters who secured a partial relief by way of a Rs.1400 crore package of concessions, the IT and the ITES sectors will have to grapple with the consequences of a stronger rupee in a number of more nuanced, and often unique, ways.

A greater recourse to hedging as well as striving for multi-currency revenue streams automatically suggests itself. Already one company, TCS, by resorting to these methods extensively has turned in an above-average performance during the first quarter. The U.S. market will continue to be the dominant one in the foreseeable future. The rupee could become even stronger. Most IT companies have been grappling with more mundane problems such as a high level of attrition amidst rising wage costs and inability to secure the right type and number of American visas. The BPO industry and many medium-sized software exporters are reportedly operating on thin margins. The rupee’s strong performance is expected to force the pace of consolidation among these but a shift to lower cost destinations is also likely. On the positive side, marketing and other promotional costs will come down. The bigger companies, some of them with iconic status, have a special responsibility in continuing to boost productivity, innovate and improve on their already successful global delivery models. For the top companies, a rising rupee need not be a threat; it could spur a move towards greater innovation and efficiency.

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