How the rupee hit IT sector in 2007

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 slowed down the hiring plans of companies like Infosys, Satyam and HCL Technologies and also put pressure on their margins. Country's top software exporters -- TCS, Infosys, Wipro, Satyam and HCL Technologies have added 25,801 employees in the second quarter of 2007-08, against 27,000 in the second quarter of last fiscal.

Infosys added 4,530 people in the second quarter this fiscal, against 7,741 people in the same quarter previous fiscal. Satyam added 3,037 people in the July-September period, compared 4,025 in the same quarter previous fiscal. HCL added 3,826 employees during the same period against 3,625 in the corresponding quarter last year.

Hiring, however, remained strong for TCS and Wipro. TCS added 9,268 people in the second quarter this fiscal against 6,663 in the same quarter previous fiscal, while Wipro added 5,341 people in the same period against 4,744 last year.

On the effect of rupee appreciation on the industry, Nasscom President Kiran Karnik said the small and medium enterprises have been hit hard by appreciating rupee.

To compensate the effect, the government should give benefits in the form of tax sops, which includes extending of Software Technology Parks of India beyond 2009.

Despite appreciation of the rupee, Nasscom, the premier trade body of the Indian IT industry, has expressed confidence that it would meet the IT export targets for this financial year and its $60-billion target for 2010.

However, if the trend continues, India may not be able retain its position as an attractive destination for IT outsourcing in the future.

The appreciating rupee is hurting goods and services exports. Indian IT firms derive a large portion of their revenues from the US and a strengthening rupee has eroded their margins, Karnik said.

The input prices are going up rapidly, while the output remains the same, which is hitting SMEs and BPOs hard, he added. The rupee appreciation has also led to a drop in salary growth to 25 per cent from 64 per cent last year, according to an industry chamber.

The top four IT companies -- TCS, Infosys, Wipro and Satyam -- which account for more than 70 per cent of the IT sector's revenue, highlights that salary growth has fallen from a high rate of 64 per cent till last year to 25 per cent.

The sales growth of the top IT firms has come down from an average 45 per cent in first two quarters of the previous fiscal to 27 per cent in the current financial year.

The average net profit growth of IT majors has declined to 22 per cent in the April-September period of the current financial year, compared to the 48 per cent growth in the same period last year. As a result, the IT companies are compelled to reduce the wage hikes to cut down expenses.

However, a research firm said it is the rising salary levels and not the appreciating rupee or attrition rate that is the most pressing concern for ITeS and BPO industry.

"Majority of the ITeS and BPO companies rank rising salary levels as major concern affecting or likely to affect future growth of the industry," the firm said.

This is followed by the rising rupee, shortage of skilled manpower and removal of tax sops. To solve the problem of talent crunch, companies have already started exploring other emerging markets like Eastern Europe and Latin American countries. The move would also take care of rupee appreciation to a certain extent.

Though certain issues like rupee appreciation have caught the industry off-guard, the industry feels that India is expected to remain the preferred choice for outsourcing services. Earlier, out of an $100 investment, $80 used to come to India and only $20 went to Philippines, China or Vietnam, but now "we are beginning to see the ratio changing to 70:30 or even 60:40, Nasscom President Kiran Karnik said while commenting on companies shifting their focus from India to other low-cost destinations.