sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
Latest Expert Exchange
« News Headlines »
 Don’t invest in the names of multiple family members to avoid paying income tax
 Master Direction – Reserve Bank of India (Relief Measures by Banks in Areas affected by Natural Calamities) Directions 2018 – SCBs
 Tax on gifts? Always tax-free, if received from relativesa
 Notification No. 76/2018 – Customs Ministry Of Finance
 The only receipt that remains tax-exempt
 Central Goods and Services Tax (Eleventh Amendment) Rules, 2018
 Know how you can save tax on capital gains
 CBDT extends deadline Income tax return (ITR) filing
 Notification Ministry Of Finance
 Gifts from relatives are always tax-free
 Notification No. 85/2018 - Customs (N.T.) Central Board Of Indirect Taxes And Customs

Appreciating ITs levers
December, 13th 2007

Murmurs of the high profit margins of IT services firms coming down have been going around for some time now quite. Rising wages coupled with increasing costs of operation have been pointed out as reasons for downward pressure on margins. In reality, companies in the sector have sustained or actually improved margins and continued to generate shareholder returns through high growth and return on equity. Now with the sharp appreciation of rupee over the last nine months, t he debate has again gathered momentum.

For a typical IT services firm almost all the revenues are in US dollars, and to a lesser extent euros, while costs accounting for between 35 and 45 per cent of revenues are in rupees. These costs include salaries paid to staff, rental costs, administrative costs and the like. Thus, every 1 per cent appreciation in the rupee leads to a reduction in margins by 30-45 basis points (0.30-0.45 per cent), depending upon the currency diversification of revenues.

Less buffer?

Previously, the rupee acted as a partial buffer against cost pressures, such as wages and rentals, due to its depreciation against other currencies. Now, not only is the buffer not available, the currency appreciation is actually adding to margin pressure. With a cumulative currency appreciation of 12 per cent since the beginning of the year, one would have expected margins to shrink by 3-5 per cent. However, an observation of last three quarters margins for top tier firms reveals they have managed to avoid the squeeze.

Increase in prices has been a major contributor to holding up the profits. For the first time, IT services firms have witnessed price increases over the last two years, which has coincidentally come at the same time as rupee appreciation and negated its impact. While existing customers have been hesitant to increase prices, new contracts have been won at higher rates. With differential of 3-4 times between onsite and offshore billing rates, there seems to ample scope to increase prices and yet retain attractiveness of offshore solutions.

Countering the impact

Additionally, companies have begun to structure their contracts such that the risk of currency movement is shared with the customers. An example is stable prices within a certain price band of currency movement with resetting of rates if the rupee moves beyond the band.

Finally, the sector has been witness to maturing of processes and achievement of scale over the years. This has led to productivity improvements which buffer the impact of currency and other margin pressures to an extent. Many firms have also started scouting for acquisitions in Europe to diversify their currency exposure, but the exercise appears to be of limited benefit as their existing dollar revenue streams would continue to be exposed to the currency risk.

In summary there do exist levers with most firms to counter the impact of currency movement, at least to some extent. As with every measure however, the effectiveness will be determined by how well these steps are executed.

Vikram Singh Beniwal
(The author is HeadTechnology, Baring Private Equity Partners India.)
Home | About Us | Terms and Conditions | Contact Us
Copyright 2018 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Privacy Policy

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions