Rupee Appreciation in IT Industry

Rupee appreciationIn

IT INDUSTRYSubmitted 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.

  1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01*

Domestic software Market 490 670 920 1250 1700 2450

Software Exports 734 1085 1750 2650 4000 6300

Indian Software Industry 1224 1755 2670 3900 5700 8750

Indian Software Industry 1995-2000 (US $ million)

 India Based

India CentricSubtotal(International)

Domestic Total 1998

IT Services 23 7* 30 8.5 38.5 2.1

Software Products

8 2 10 9.5** 19.5 0.6

IT-enabledService

15 2 17 2 19 0.4

E-business 4 1 5 5 10 0.2

Total 50 12 62 25 87 3.3

Projected Revenues - 2008($ US billion)

Exports of $50 billion in 2008

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 balance-

of-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-on-

year 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

The Top 20 Exporters

Rank

Company

Exports (in Rs crore) Growth

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

Top 20 IT Companies and there Comparative Revenue Analysis

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

TOTAL 101,218 80,445 25.8

Contd.

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

Thank You