It’s time for some cheer in India’s $18-billion business process outsourcing (BPO) industry with the depreciating Indian rupee providing a much-needed breather to the export-driven BPO firms whose diminishing cost arbitrage had impacted margins in the last several quarters.
India-based BPO companies with maximum exposure in the US are expected to lead the party unlike its peers who have large near-shore presence and incur significant chunk of their cost in dollars and pounds.
Industry experts point out that BPO firms are likely to see a favourable impact in their profitability during the April-June quarter. However,the impact might be limited as most of the currency fluctuation happened in June. A positive impact of 10-15 bps is expected in the quarterly results.
The likes of EXL Services and WNS,which are primarily India-based,are favourably impacted by this. However,the likes of Genpact,which have multiple near-shore centres in the UK,Czech Republic and other places in Europe,will not reap the benefits as a significant part of their costs are in dollars and pounds, Pradeep Udhas,partner and head (IT-ITes),KPMG India,told FE,adding that BPO firms focused on the Indian market will not be impacted as their costs and revenues are both in rupees.
Typically,a 1% fall in the rupee versus the dollar results in an increase of 30-50 bps in profitability. On June 20,the rupee nearly touched the 60-mark against the dollar for the first time in history,depreciating 10% in just a month.
We are all grinning from from ear to ear, said,Raman Roy,chairman & managing director,Quattrro,a BPO services firm. However,he cautioned that the depreciating rupee could lead to a demand for price cuts from the customers. Roy said that those BPO companies which have contracts that are short-term in nature with tenure of a year could witness some pressures from clients who would push for some price reductions.
A depreciating Indian rupee has always worked in favour of the export-oriented sector,but the volatile movement of the currency against the US dollar is unlikely to bring any long-term benefits for the industry.
Sid Pai,partner and managing director,TPI India,a sourcing advisory firm,said: The depreciation of the rupee will work very well for BPO providers in the short term. They are exporters and,as a result,will be beneficiaries, adding that in the medium-to-long-term,clients will expect that the savings are passed on to them; so should the rupee stay depressed,dollar prices will end up going down, he said.
The functional currency for the BPO industry is the rupee although they transact a major portion of their business in several foreign currencies The sector generates the majority of its revenues in foreign currencies,such as the dollar or the UK Pound Sterling and incurs its expenses in Indian rupees.
Som Mittal,president,Nasscom,feels that the absolute rate is not so much a concern for the industry as the volatility. Such sudden fluctuations impact the planning process for companies and customers. We hope to see that the rupee stabilises for better planning and decision making for the ITBPM industry.
Experts point out that a record low rupee has prompted Indian BPO companies to rethink the way they hedge their revenues from US clients. Several leading Indian IT-BPO firms incurred losses during the January-March quarter due to foreign exchange volatility. EXL Services has done something in agreement with many of its clients,where the benefit of a depreciating rupee directly goes to the clients,as also the risks due to any appreciation of the rupee. Firms like TCS follow a short-term hedging strategy. The advantage of this strategy is that the downside is limited; however,on the flip side,any benefits to be gained out of a depreciating rupee are not possible, said Udhas of KPMG.
BPO firms do not hedge 100% of their receivables. The number typically varies between 60-80% of total receivables. Indias BPO industry has been going through a rough phase in the last two years with increasing pressure on profitability. Experts feel quicker response time,better technical support and near-shore advantages are driving businesses to other outsourcing destinations. In addition,wage inflation over the years,forex losses and poor hedging strategies have impacted the margins of companies further.
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