Strong Indian Rupee Continues to Weigh on Software Exporters

The Indian rupee, which rose 6.8 percent against the dollar in the June quarter to 40.72, poses a big problem for software services exporters that get more than 60 percent of their revenue from the United States.

Every one percent rise in the value of the rupee against the dollar shaves 30-50 basis points from operating margins of Indian software services exporters, analysts said. This would have lowered the net profit of top companies by 1-15 percent in the three months ended June from the March quarter, they said, with wage rises and costs related to getting US visas for work permits at client sites.

Infosys Technologies Ltd. (INFY) which kicks off the results today, is expected to post net profit rose 21.2 percent in the fiscal first-quarter ended June from a year earlier, according to a Reuters poll of 10 analysts. Compared with the March quarter, the estimate will be 15.3 percent down, it showed.

Analysts at Westpac Bank expect the rupee to rally further to 39.4 per dollar by the end of the year. Even so, margins for the top software companies are still well in the double digits, and over 20 percent for the top three exporters.

Wages in the sector are rising by about 10 to 15 percent a year, compared with 2-6 percent in the West, as companies try to retain staff from being poached by rivals such as IBM (IBM) and Accenture (ACN).

Tata Consultancy Services, India’s top software exporter, is expected to post 25 percent rise in quarterly earnings on July 16, followed by number-three Wipro (WIT) up 22.3 percent on July 19.

India’s booming software services industry has been winning large outsourcing business from overseas clients like ABN AMRO (ABN), Airbus, and Qantas but growth is expected to slow. Last week, an industry body forecast software services exports would rise 26 to 29 percent to around $40 billion in the fiscal year to March 2008, slower than a 33 percent rise in 2006/07.

The rupee has risen more than nine percent against the dollar in 2007, propelled by rising foreign investment in the fast-growing economy. This reduces the amount of rupees that exporters get when dollar earnings are converted.