Rupee Depreciation
On a Pendulum Despite helping the balance sheets, rupee depreciation has failed to excite IT export firms because too much volatility has affected the planning process
STUTI DAS stutid@cybermedia.co.in
T
he Indian rupee depreciated by 11% against the American dollar from the same week of the previous year; and the rupee-dollar pair closed at 50.8 on November 30th, 2011. There was a minor solace as from the previous week, it appreciated by 3.1%. With all the brouhaha over FDI in retail both in Parliament and outside, the news about the rupee depreciation has been relegated to the business pages. The sharp decline in the rupee value has forced export companies to take stock of the situation; and instead of the usual cheers, there is a quiet caution in the air for fear of the prevailing un44 | December 31, 2011
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certain global environment to hurt the clients’ revenue performance.
“For MindTree too, being a net exporter company, it has been good for the bottom line since it would realize more rupee and with the cost too being in rupee, it’s a twin advantage”
Reasons for Rupee Depreciation
Voices from all quarters post sharp decline in rupee called for the RBI to step in and contain the depreciation; however Finance Minister Pranab Mukherjee has categorically ruled out RBI’s role in the forex market, since the intervention unlike the popular perception would not assist in controlling the decline. Arguably, like most of us already knew, the exit of Foreign Institutional Investors (FIIs) from the Indian stock market coupled with the Euro crisis (aided by Greece bankruptcy rumors) have led to the sharp decline. In a similar vein, Rostow Ravanan, chief financial officer, MindTree says, “There are lots of macro and external reasons for the dollar strength—Euro crisis and Foreign Investors (FIIs) too are not willing to invest for policy and political reasons. Although there is pressure on the rupee, however the decline has not been gradual; the decline has been sharp since September.” Although Ravanan is quick to point out that the rupee does not sustain a one-way movement for long—for instance, after touching 52 in 2009, the rupee quickly rose to 44. However for MindTree, which has half of its receivables hedged, it would not have a major impact. Supporting the above-stated arguments, Suresh Rao, group CFO, Mindteck says, “A probable explanation is that India’s inflationary trends, coupled with fiscal deficit on revenue account and the slide in the stocks are together responsible for the situation we are in. Inflation does tend to weaken currency in relation and that should not be a surprise. However, the fact remains that even during the times when our forex reserves were robust and DATAQUEST | A CyberMedia Publication
Rostow Ravanan chief financial officer, MindTree
“Even during the times when our forex reserves were robust and rupee was appreciating, we were running fiscal deficits on our trade account unlike the other Asian economies. It surprises me that this is cited as a reason for the rupee’s depreciation now” Suresh Rao group CFO, Mindteck
rupee was appreciating, we were running fiscal deficits on our trade account unlike the other Asian economies. It surprises me that this is cited as a reason for the rupee’s depreciation now. Withdrawal of funds by the FII from the stock market has again created a depreciating pressure on the rupee that cannot be denied.”
Q2FY12 from tier-1 IT companies. Thanks to a limited impact of the uncertain economic condition prevailing and, of course, a big impact of the rupee depreciation versus the American dollar (2.5% q-q on the average for Q2FY12 and 9.6% q-q on the closing rate). In fact, the full impact of the depreciation and the expectant slowdown will only become evident once Q3 starts, since most companies by then would have drafted their next year’s budgets while the full brunt of the slowdown will be evident by the Q4.
Blessing in Disguise
As per Nomura Research, the fall in rupee value has spelled good news (albeit for short term) for the IT companies, as it expects a strong
Movement of INR against Various Currencies in Q2FY12
Rupee has depreciated against all major currencies except the Australian dollar Rates (USD)
Changes (Q-Q)
EUR
GBP
AUD
EUR
GBP
AUD
Average
1.41
1.61
1.05
-1.9%
-1.3%
-1.2%
Closing
1.34
1.56
0.97
-7.7%
-2.9%
-9.9%
Source: Bloomberg, Nomura Research
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December 31, 2011 | 45
Rupee Depreciation Fig.YTD 7: Return YTD return chart Chart
Tier 1 stocks except Infosys and Wipro outperform Nifty
Tier-1 stocks except Infosys and Wipro outperform Nifty
11
19 26 31 WPRO
INFO
Ni y
CTSH
Note: up30, to2011 Sep 30, 2011 Note: YTD isYTD up toisSep Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research
Adds Nomura’s report that until now most tier-1 stocks have corrected by 11-31% YTD, while the IT stocks have outperformed the Nifty by 0-9% over the past 1 month, owing to decline in rupee value. Incidentally, most tier-1 IT companies do not seem too pleased with the rupee decline in spite of the prospect of minor gains in their profit margins. According to media reports, 5 top IT companies—Tata Consultancy Services, Wipro, Infosys, Cognizant, and HCL Technologies—together have hedged nearly $5 bn in hedges, by and large about `45-49 to $1, which actually stops them from looking forward to a bonus gain. According to an Economic Times’ article, Infosys, India’s second largest IT firm, has hedged more than $700 mn at `49 to $1. Infosys is of the view that the fall of the rupee might have a slight helpful outcome on its operating margins. However the fact is that during the last one month the American dollar has appreciated notably next to other currencies as well. 46 | December 31, 2011
Passing the Benefits
HCL Technologies has been quoted in media reports as saying that the company intends to pass on some benefits of the 11 11 rupee depreciation to its customers but only on select deals. While for overall, it will go with the stated 14% operating margin target and reinvest the excess margins to drive TCS HCLT higher growth. This essentially means that the company will lower the billing rate, but only after ensuring that its margins are intact at 14%. The company also plans to take long-term currency hedges for protection from the rupee appreciation in the future. For MindTree too, being a net exporter company, it has been good for the bottom line since it would realize more rupee and with the cost too being in rupee, it’s a twin advantage. “Around 90% of our headcount is in India, therefore the salaries too are all paid in Indian rupees, so there also we benefit as more revenue is generated from the foreign currency,” says Ravanan.
Volatility: A Serious Concern
Nasscom in a statement said that the volatility of the currency movement might create an obstacle for the Indian software exporters. In a media report Ameet Nivsarkar, vice president, global trade development, Nasscom quoted, “There is a marginal positive impact, but volatility is a concern. Now it’s depreciating, but sometime ago, it was the other way round. This volatility makes it visit www.dqindia.com
difficult to plan and this is a concern from an industry point of view.” However downfall of rupees has always been believed to have positive impact on the revenues of the Indian software exporters as exporters get more rupees per American dollar, though Nasscom believes the volatility of currency movement should not be there. As most IT companies follow a conservative hedge policy of at least securing 50% of their inflows through forward contracts and as such since most of these contracts would have been done at an average around `47 to a dollar, there would be mark to market losses that would arise with all these hedge positions. These losses are generally provided for in the PL accounts of most companies in accordance with the governing accounting standards. Incidentally, the rupee depreciation has not just been against the dollar but even against other currencies as well like the Pound and Euro. Som Mittal, president, Nasscom says that the major worry for the industry at present is the instability of currency, which needs to be in a smaller range in order that there is constancy in pricing. The instability notwithstanding, Nasscom asserts that the IT-BPO industry will witness a growth of 1618% during the FY12. For the uninitiated, even a change of 1% in rupee has about a 40-50 basis points deflection on the profitability of the Indian IT firms. Rao reasons that it is difficult to have a view since the markets are very volatile and fraught with uncertainty. “However, depending on how soon we get some good news on the European sovereign debt crisis and the flowback of FII money into our stock markets, we could hope for a sustaining appreciation in rupee to kick in during the latter half of the next quarter,” he shares. n
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