India’s largest software company Tata Consultancy Services Ltd (TCS) said the rising rupee could impact its net profit margin by almost 2.5% this quarter, as the dollar weakened by nearly 8% against the Indian currency in the last six weeks.
TCS does application development, maintenance and back-office services work for customers—largely US firms such as Citibank NA and General Electric Corp.—and bills most of them in dollars. A weakening dollar translates into lesser rupees.
TCS chief financial officer S. Mahalingam called the current quarter a “killer cycle”, even as “the company maintains around $1.5 billion (Rs6,150 crore) as hedge for the next 24 months”.
S. Mahalingam, chief financial officer, TCS
He added that every percentage point depreciation in the dollar translated into approximately a 40 basis points, or 0.4%, reduction in the company’s net profit margin, defined as net profit expressed as a proportion of total sales.
“But overall, from a TCS perspective, we need to ensure that we are not losers in a major way,” he said.
The country’s third-largest software firm Wipro Ltd also said that its profitability would be adversely affected if the rupee continues to trade at Rs41 against the dollar. At this rate, “the company’s margins will get impacted by more than 5%, which will be difficult to manage by any other means,” said Rajesh Ramaiah, Wipro’s corporate treasurer.
TCS, which now employs almost 90,000 software workers, will also be slowing down on recruitment (it has been adding almost 30,000 professionals to its employee base every year), in order to pursue other models of growth such as growing its consulting business, which contributed around $100 million to the total revenue last year. “We will continue to grow our consulting business at least by around 40%,” said Mahalingam.
By 2010, when TCS becomes a $10 billion company, it “will employ more than 2,00,000 professionals if the arithmetic is right, and it would attempt to reduce linear growth by increasing revenues from its banking products business,” Mahalingam added.
Currently, revenues from banking product FNS accounts for 2% of TCS’ total revenue.
India’s standing as a preferred offshore destination for saving software development costs is also facing the challenges of rising wages and higher attrition rates.
TCS, which has an attrition rate of 11%, sees this as a deterrent for new players to start operations in the country, “as the new entrants may not find it attractive from cost point of view,” Mahalingam said.
The Indian technology services industry, which employs more than a million professionals, saw the wages of software professionals increase between 15% and 20% last year.
“Now, especially when we are also dealing with the currency issue, the industry will be looking into the wage hikes this year and the inflation (increase) may not be in the same scale.”
TCS also said it will not chase mega deals that are in excess of $1 billion where entire IT assets of customers are transferred to the vendor “because the return on capital employed (in such deals) is not as good,” Mahalingam said.
Customers are dissatisfied with mega deals today because such engagements are very complex to manage “and they find it increasingly challenging to manage relationships across IT systems, which includes servers, desktops and other business applications,” said John C. McCarthy, senior vice-president of IT services research at Forrester Research.
TCS has more than 10 deals in the pipeline that are worth $50 million each, Mahalingam said. For the quarter to March 2007, TCS’ average revenue per customer among its top 10 customers was around $112.3 million.