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HCL Tech uses rupee depreciation to generate demand

HCL Tech uses rupee depreciation to generate demand
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First Published: Tue, Nov 29 2011. 05 28 PM IST

Updated: Wed, Nov 30 2011. 12 49 AM IST
Last week, this column talked of how the sharp depreciation in the rupee has come as a boon for Indian information technology (IT) firms. And that it will not only lead to an increase in margins and earnings, but also give companies leeway to spend more on sales and marketing to generate demand.
Interestingly, HCL Technologies Ltd has told analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd that it plans to pass on some of the benefits of the rupee depreciation to customers on select deals. The company essentially said that it will stick with its stated 14% operating margin target and reinvest the excess margins to drive higher growth. Some of this will be through investments in sales and marketing, and in building the solutions and platforms business.
But in selective cases, where there is a prospect of significant volumes over a period of three-five years, HCL Tech is also willing to pass on the benefit of the currency depreciation to clients. In other words, it will lower its billing rates after ensuring that its margins are intact at 14%. It also plans to take long-term currency hedges for protection from the rupee appreciation in the future.
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This is a clever way to generate demand, especially at a time when the slowdown in the global economy is threatening to hurt demand for IT services. At the same time, it can also be seen simply as a policy of giving volume-linked pricing discounts. HCL Tech has been known to be flexible with its pricing policy, which is also reflected in relatively lower margins vis-à-vis other top-tier IT companies. In the past, this has led to higher-than-industry volume growth, although growth in profit has not been commensurate because of pressure on margins.
It’s quite likely that the move to pass on benefits of the rupee’s depreciation will once again drive volume growth at HCL Tech. It’s to be seen whether this will lead to higher profit growth as well. The company’s shares have fallen marginally since September, after the rupee started depreciating, while the CNX IT index has risen by over 8% during this period.
Graphics by Yogesh Kumar/Mint
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First Published: Tue, Nov 29 2011. 05 28 PM IST