Rupee Appreciation In It Industry

Rupee appreciation In IT INDUSTRY Submitted By: Kanika Anand Lipi Agarwal Priyanjana Ghatak Swati Singh Varun Sharma Vikas Sharma Vipin Khandelwal

 

Research Details

Research Objectives:  Finding out the Reasons  & Impact of Rupee appreciation/Depreciation on IT  Industry, to discuss what all positive traits as well as negative traits did Rupee  Appreciation/Depreciation had on IT Industry, steps taken by IT Industry against  Rupee Appreciation/Depreciation.

Data Collection Method: Secondary Data

Methodology: We have compared the revenue generated by IT Industry in  various years so as to do the comparisons. This actually helped us to understand  that how much IT Industry has lost after Rupee Appreciation.

Overview of Indian IT Industry  The IT Industry has grown from a mere US $ 150 million in 1991-92 to a staggering US $ 5.7 billion 1999-2000.

 India’s software exports would be around $ 6.3 billion, in addition to $ 2.5 billion in domestic sale.

 According to a NASSCOM-McKinsey report, annual revenue projections for India’s IT industry in 2008 are US $ 87 billion and market openings are emerging across four broad sectors, IT services, software products, IT enabled services, and e-businesses thus creating a number of opportunities for Indian companies.

             Indian Software Industry 1995-2000 (US $ million)

  

Domestic software  Market 

Software Exports  Indian Software  Industry 

1995-96

1996-97

1997-98 1998-99 1999-2000 2000-01*

490 

670 

920 

1250 

1700 

2450 

734 

1085 

1750 

2650 

4000 

6300 

1755

2670

3900

5700

8750

1224

Projected Revenues - 2008 ($ US billion) Exports of $50 billion in 2008

 

India Based

India Centric

Subtotal Domestic Total (International)

1998

IT Services

23

7*

30

8.5

38.5

2.1

Software Products

8

2

10

9.5**

19.5

0.6

IT-enabled Service

15

2

17

2

19

0.4

E-business

4

1

5

5

10

0.2

Total

50

12

62

25

87

3.3

Currency Appreciation  Appreciation is a rise of a currency in a floating exchange rate.  Currency Appreciation means that the given currency has become more valuable with respect to another currency.  For example if the rupee appreciates it means that rupee has become more valuable in relation to dollar.

Why the Indian rupee appreciated

Foreign Direct Investment (FDI)

India's outstanding economic growth has created a large domestic market that offers promising opportunities for foreign companies. Moreover, the country's rising competitiveness in many sectors has made it an attractive export base. These factors have boosted FDI inflows into the country. For example, in 2006-07, FDI amounted to around US $16bn, almost three times the previous year's figure. More than half of these inflows arrived in the final four months of the fiscal year (December 2006-March 2007).

External Commercial Borrowings (ECBs) Indian companies have borrowed enormous amounts of money overseas to finance investments and acquisitions at home and abroad. India's balanceof-payments (BoP) data reveal that inflows through ECBs amounted to an enormous US $12.1bn during April-December 2006, a year-on-year jump of 33%. The flood of borrowed money is likely to grow in 2007. In the first three months of the year, Indian companies have notified the RBI of their plans to raise nearly US $10bn in overseas debt markets.

Foreign portfolio inflows India's booming stock market embodies the confidence of investors in the country's corporate sector. Foreign portfolio inflows have played a key role in fuelling this boom. Between 2003-04 and 2006-07, the net annual inflow of funds by Foreign Institutional Investors (FIIs) averaged US $8.1bn. Trends during the first five months of 2007 indicate that this flood is continuing, with net FII inflows amounting to US $4.6 billion. Another major source of portfolio capital inflows has been overseas equity issues of Indian companies via Global Depositary Receipts (GDRs) and American Depositary Receipts (ADRs). Inflows from GDRs and ADRs amounted to US $3.8bn in 2006-07, a year-onyear increase of 48%.

Investments and remittances       Indians settled in other countries have also been a major source of capital inflows, with many non-resident Indians (NRIs) investing large amounts in special bank accounts. While NRIs' emotional connection to their country of origin is part of the explanation for this, the attractive interest rates offered on such deposits has also provided a powerful incentive. In 2006-07, NRI deposits amounted to US $3.8bn, a 35% increase over the previous year; the outstanding value of NRI deposits as of end-March 2007 was US $39.5bn. Another large source of foreign-exchange inflows has been remittances from the huge number of Indians working overseas temporarily. Such remittances amounted to a colossal US $19.6bn in April-December 2006, a 15% year-on-year increase.

Data analysis

The Indian IT sector, credited with India Inc's strong image globally, had to sail through rough waters last year as incremental rise in the value of rupee created turbulence in an otherwise sunshine sector. The rupee, which rose by over 12 per cent against the dollar this year, has severely affected the IT companies.

Share of the Top 20 Exporters Dropped,  reversing a Trend of many Years

Comparative analysis

• Infosys managed to maintain the operating margin by increasing its per employee revenue by close to 5%. • It managed to increase rates, both from existing clients and new clients. • It changed its services mix with systems integration/consulting now contributing a higher percentage to its revenue increased the offshore component in the services segment, and finally even reduced overheads through scale benefits.

• Most large companies have delivered on the operating margins, and absolute net margin growths, which often move stock prices in India. • FY08 has been a year in which resilience of this industry was tested. On many increases, they have actually delivered better than the previous year.

By Numbers The IT services exports from India grew 25.7% in FY08 to reach Rs.105684 crore in dollar terms, its size stood at $32.9bn, up 39.9% from FY07’s export of $23.5bn. This does not include BPO revenue but includes all other areas: products, outsourced product development, engineering services, and consulting. The top 20 exporters too grew at the same rate, 25.8% and clocking a combined revenue of Rs. 101218 crore ($25bn) or 76% of total IT export revenue from India.

Business by Top IT Players

Top 20 IT Companies and there Comparative Revenue Analysis The Top 20 Exporters

Rank

Exports (in Rs crore)

Growth

Company FY 08

FY 07

FY 08

FY 07

(%)

1

1

TCS

20,261

15,880

27.6

2

2

Infosys

15,531

13,025

19.2 

3

3

Wipro

12,783

10,119

26.3

4

4

Satyam

7646

5,843

30.9

5

7

Cognizant

6310

4,584

37.7

6

5

IBM

5890

4,880

20.7

7

6

HCL Technologies

5800

4,598

26.1

8

9

Tech Mahindra

3571

2,875

24.2

9

10

Accenture

3550

2,700

31.5

10

11

HP

2782

2,254

23.4

Contd. 11

10

Patni

2,556

2,638

-3.1

12

12

I-flex

2384

1,976

20.6

13

8

Oracle India (excluding I-flex)

1920

1,731

10.9

14

19

MphasiS

1881

1,299

44.8

15

12

L&T Infotech

1,627

1,244

30.8

16

13

Capgemini

1572

1,207

30.2

17

22

CSC India

1571

808

94.4

18

15

Perot Systems

1301

975

33.4

19

14

Aricent

1194

1,041

14.7

20

21

Prithvi Information Solutions

1088

768

41.7

101,218

80,445

25.8

TOTAL

Effects of Rupee Appreciation on IT Industry

 Loss of status as an attractive outsourcing destination.  Laying off employees which led to high attrition rate.

 Recruitment from countries other than India.  The employees had started feeling the pinch in the form of lesser salaries and lesser recruitment.  Pressure on profit margins.  Certain companies were unaffected such as Rolta India and

3iInfotech.

 Great volatility in the stock price of IT companies.

Steps to be taken by IT industry

 Adapt to changing market scenarios quickly.  Diversify globally especially european markets.  Address skills shortage.  Innovate: do things differently and not necessarily different things.  Tighten recruitment process.  Enter into local markets as the opportunity is not worth ignoring.

A COIN HAS TWO FACES. Here’s the other one…

• Helped gain confidence of foreign investors. • Companies like Infosys and L&T generated foreign exchange gains due to reduced interest payouts. • Major stock indices scaled new peaks due to a high correlation between sensex and INR. • It helped control inflation. • The IT hardware players saw the positive side of rupee appreciation. Companies such as HCL, IBM India import hardware and software and thus when rupee appreciates they can buy more goods per dollar.

CONCLUSION

• It can be inferred that the issue of INR appreciation will play a major role if India has to become a superpower nation by 2020. • This is indeed a bit tricky for the Indian IT industry, but there’s no real reason to panic. • With a slight course correction and an unswerving view on the long-term, the Indian IT industry can emerge stronger and bigger.

QUERRIES

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