Rupee at all time high against dollar, IT sector cries foul

BAD NEWS FOR IT COMPANIES: The rupee is wreaking havoc with the fortunes of the IT sector once again.

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New Delhi: Rising rupee has sparked off worries that the Indian technology sector may be caught on the wrong foot again. The rupee is wreaking havoc with the fortunes of the IT sector once again. A one per cent rise in the rupee translates into a 30 basis-point fall in EBIDTA margins, and a 1.5-2 per cent fall in earnings per share.

The rising rupee is affecting IT and IT-enabled services companies, and to some extent pharma and other export-oriented sectors.

Leading software service exporters, who earn most of their revenue in the United States, fell after the rupee strengthened past 40 per dollar for the first time since May 1998.

The rupee has risen 11 percent against the dollar this year, and analysts say every 1 percent rise in the currency cuts the firms' margins by 30 to 50 basis points.

But tech companies are not betting only on dollar hedges to buffer their currency-related losses. They are tightening cost controls, and also focusing on adapting their revenue model to make it dollar- rupee insensitive.

But a rising rupee may not be the only spoilt sport. The sharper than expected rate cuts by the US Fed is being read by some as an indication that the American economy was, in fact, headed for a recession.

And that raises a larger question—will a recession put paid to large i-t spending. Markets will get a clearer picture on US corporate profits and technology spending for the third quarter by early November. And till then, it looks like Indian tech stocks may be in for a tough time.