By Vipin Agnihotri
Winter in setting in India but the IT sector is facing the heat of the rising rupee. It’s quite clear when you see their second quarter results, which have just come in.
In terms of statistic, Infosys and TCS have reported a net profit of Rs 10.74 billion (increase of 19.8 per cent) and Rs 12.53 billion (increase of 22.8 per cent) respectively. While some mid sized firms like Mastek and iGate showed decent gains as well. In fact Mastek managed over 18 per cent growth in their net profits of Rs 251.2 million.
Point to be noted here is that there were remarkable increases of more than 126 per cent in the net profits of iGate previously. However, all in all, pure volume growth and pricing of the company while still encouraging, are far behind previous quarter numbers. In part because of the rising rupee, these IT companies weren’t able to put a magnificent show with their top lines.
In my opinion, Infosys profitability has increased but its still below the expected level. All this is happening because of rupee appreciation. It is worth mentioning in this regard that for every 1 per cent increase in rupee against the dollar, the operating margin of Indian IT sector is getting affected by around 40 to 50 basis points.
With the rupee gaining around 2.5 per cent since the US rate cut last month and more than 15 per cent over the last one year, one can understand the pinch. If experts are to be believed, attrition and a slowdown in the US economy have made it even more challenging for these software giants to manage their margins.
It has come into the notice of The India Street that most companies had tremendously increased their currency hedging positions in the last two quarters but still the increase is not enough to stop the rupee from denting their bottomlines. In my opinion, IT companies like Infosys really need to take appropriate steps such as increasing utilization rates and billing rates in order to counter the move and drive profitability.
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