Bangalore: To insulate itself against currency volatility, India’s second largest software firm by revenue Infosys Technologies Ltd is convincing at least some clients to bear a portion of the risk.
Looking ahead: Infosys chief financial officer V. Balakrishnan says he expects the rupee to be highly volatile against the dollar. Hemant Mishra / Mint
“We have signed (such agreements with a) few clients. (But) not every client agrees to that,” said V. Balakrishnan, chief financial officer at Infosys. “It will work both ways. If the rupee appreciates they pay, when it depreciates, we bear the cost.”
Infosys has negotiated with individual clients to share up to 5% of the currency risk, he said without disclosing how many such contracts it has signed in the past months.
This is in addition to Infosys’ foreign exchange hedges on the Indian rupee’s fluctuations against the dollar, the currency in which it bills three of four customers. As of April, the company has total hedges of $515 million (around Rs2,300 crore).
As double-digit growth returns, the biggest challenge for the export-intensive information technology (IT) industry in India is the strengthening of the rupee against the dollar.
The Indian currency stood at Rs44.60 to the dollar on Monday, a 16.6% rise from Rs52 in March 2009.
Infosys and other IT firms were in a similar situation in 2007, when a strengthening rupee—trading in the early 40s to the dollar—hurt their profits. Customers in the US account for almost two-thirds of the business of large Indian software firms.
The Federation of Indian Export Organisations (FIEO) said such contracts covering currency risks are unheard of in India and customers would hesitate to sign them.
“It may be an individual case, but it doesn’t happen normally,” said Sushil Kumar, an assistant director for foreign exchange at FIEO. “(But) what it helps is to maintain margins, which otherwise can be lost due to the volatility.”
An economist with a credit rating agency said such contracts would work out cheaper than hedging in forex markets. He did not want to be named as his firm’s policy prohibits him from commenting on individual companies.
Infosys, which has projected dollar revenue to grow 16-18% in 2010-11, expects the rupee to rise 9-11% against the dollar. For its revenue outlook, it has factored the rupee at 44.50 to a dollar. Balakrishnan said he expects the rupee to be highly volatile against the dollar. “In the past, whenever the rupee has appreciated sharply, we also have seen it depreciating the same way.”
Earlier this month, Jamal Mecklai, chief executive of Mecklai Financial and Commercial Services Ltd, had told Mint that the rupee would not strengthen dramatically though “there will be lot more volatility”.
He had forecast the rupee to trade in the range of 43.50 to 46.50 a dollar by December.