New Delhi, Oct. 16: The margins of domestic software companies, which export software services, are under pressure as they battle an over 5 per cent increase in the rupee coupled with growing competition, higher marketing spend and increased salaries.
Analysts said an appreciating rupee, which jumped by more than 5 per cent against the dollar since the start of 2003 and is currently at a 35-month high, could slice profits by around 15 per cent.
“If the rise is sustained till the end of the current financial year, profits could be lower by 15 per cent,” said vice-president of Bajaj Capital Surajit Mishra, adding that a 1 per cent appreciation would impact net profit by 2-3 per cent.
Software companies, including business process outsourcing units, said a firmer rupee would impact revenues and margins which in turn would hurt competitiveness.
Leading software service companies, including Infosys Technologies, Satyam Computer Services and Wipro Ltd, export nearly 70 per cent of their services to North America.
“The only way to offset the currency effect is to hedge the dollar earnings and being more efficient,” said Icra managing director P. K. Chowdhury.
Wipro has hedged nearly Rs 680 crore ($150 million), while Satyam, which had no forward contracts at the beginning of the year, has now hedged about $50-60 million.
National Association of Software and Service Companies (Nasscom) president Kiran Karnik said, "As long as there is a slow and steady appreciation of the rupee, revenues will not be impacted. Software and services companies will be hit in a major way if there is a sudden fluctuation in the exchange rate. However, the profitability of the companies will be affected by the appreciation since the margins get disturbed. Companies resort to hedging to cover rupee risks but this does not help in the long-term."
According to Hughes Software Systems chief Arun Kumar, “Our margins were affected by the appreciation of the rupee this quarter. It is good for the country when the rupee appreciates but it affects the margins of the software companies and it is reflected in each quarter. It is an aspect that is beyond our control.”
Sameer Kochhar of Skoch Consultancy services said, “Rupee appreciation will affect the software and services companies in the long run. Further, hedging comes with a price tag. If the rupee constantly appreciates, the cost of hedging will be more. As a result, there is a constant move towards fixed value contract by the companies.”