Informist, Friday, Dec 24, 2021

By Sai Ishwarbharath
 

CHENNAI – Weakening of the Indian rupee against the US dollar is seen stabilising the operating margins of Indian information technology companies for Oct-Dec amid rising employee costs, and travel expenses gradually returning.

Margins of the technology companies have been facing headwinds after peaking in Oct-Dec last year. Had it not been for the cushion offered by the depreciating rupee, the profitability could face further pressure. 

"Changes in exchange rate of rupee against the US dollar is a lever that the Indian IT industry has traditionally taken support of to partially mitigate cost increases," said Venkatraman Narayanan, managing director and chief financial officer at Happiest Minds Technologies Ltd.
 

Fluctuation in the rupee does impact quarter-on-quarter performance, though a reasonable part of this gets factored into their annual hedging policies, Narayanan told Informist.

IT companies bill most of the clients in terms of US dollars. Americas, including the US, account for about 50-60% of total revenue for these companies.

"The US is still the single largest market for information technology companies but 60-75% of their work is done through offshore (resulting in lower costs) and most expenses for the companies are also in terms of rupee," said Sanjeev Hota, the head of research at Sharekhan. "The benefits (of weak rupee) will be flowing into Oct-Dec quarter's margins which would have otherwise been impacted by talent-related issues and return of travel costs."

Analysts say a 100-basis-point depreciation in the rupee generally translates into a 30-basis-point operating margin benefit for the companies. Also, benefits will be flowing from cross-currency tailwinds–currencies other than US dollar–as well this quarter.

The domestic currency has depreciated as much as 3% in Oct-Dec and 3.7% compared with the previous year. The rupee touched an 18-month low against the greenback last week ahead of the US Federal Reserve meeting.

ICRA, in its research report, said the rupee may hit as high as 78 against the US dollar in Apr-Mar. Such a scenario would mean the benefit would flow into the next quarter as well.

The operating margins are expected to be impacted in Oct-Dec due to return of travel and inching up of selling, general and administrative expenses. IT companies have also struggled to retain talent amid 'war for talent' despite giving salary hikes, skill-based bonuses and stock options.

Employee cost for India's largest software exporter Tata Consultancy Services Ltd rose 3% sequentially and 16.5% on year to 263.8 bln rupees during Jul-Sep, making it the single largest item in the balance sheet. Travel costs rose 13% quarter on quarter and 38.6% on year to 3.91 bln rupees for the same period.

Infosys' employee costs rose 3.4% sequentially and 17.5% on year to 157.4 bln rupees. Travel costs rose 22.5% sequentially and 8% on year to 1.63 bln rupees.

As IT companies faced alarming rate of attrition in Jul-Sep due to the hot job market, they increased campus hiring to dodge talent issues.

TCS said it would hire 35,000 more freshers for the rest of the year after it crossed its original target of 43,000 candidates. Infosys, too, upgraded its hiring numbers to 45,000 freshers from 35,000 for the current fiscal. HCL Technologies said it will add 30,000 freshers for 2022-23 (Apr-Mar), 8,000 higher than current fiscal.

The higher number of campus hiring has also added to the rising costs of IT majors.

"It (the fall in the rupee) is a god-send against falling operating margins for the sector," said Pareekh Jain, the outsourcing advisor and founder of Pareekh Jain Consulting. "The management commentary sounded worrisome saying margin will be back to pre-pandemic levels by FY23. Now, there is a possibility of that getting delayed."  End

US$1 = 75.20 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Akul Nishant Akhoury

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