Rising wages, costs wipe gains for IT

Bengaluru: The rupee depreciating would ordinarily have been a big positive for the Indian IT industry and goods exporters, helping improve margins and competitiveness.

But this time, other developments have partially offset the advantage. For the IT sector, wage costs continue to rise, given the shortage of talent. And the dollar has strengthened against the pound and the euro, adversely impacting Indian IT companies’ dollar revenue (30-40% revenue comes from the UK and Europe).

“Some of the advantage has been taken away as several other currencies have seen a sharper depreciation than the rupee, especially among our competing markets,” said Ajay Sahay, director general of FIEO, the group dominated by manufacturing exporters.

In any case, the full benefit does not flow to exporters, as a part of gains are with the buyer. Besides, a weaker rupee has made imports more expensive, resulting in inflation and putting pressure on costs.

Vinit Teredesai, chief financial officer at Mindtree, said the rupee movement is margin-positive in the short term, but the inflation will not be good in the medium to long term. The dollar strengthening against the pound and euro, he said, has had an adverse impact.

TCS registered an operating margin of 23.1% in the June quarter, which was 190bps down sequentially and 240bps lower than a year ago. TCS CFO Samir Seksaria said the dollar strengthening against most currencies had a 25bps positive impact on margins. But all that was negated by the increase in wage costs.

Mitul Shah, head of research at Reliance Securities, said the gains Indian companies made from the rupee slipping were nullified by a nearly 100bps cross-currency headwind. Margins, he said, were also impacted by wage hikes and supply-side pressures.