Monday, September 24, 2007

Currency rising

Todays Mint (and after my Bombay visit, I realized how this newspaper has carved out a nice niche in the financial newspapers market - hopefully more on that some other time or perhaps Amit will be a better person to ask) has a feature on which big companies will be the most affected by the currency rise.

Predictably the IT companies are top on the list with their high dependence on dollars. Alarm bells are being rung needlessly all over the place. What the rupee rise means for IT companies is very simple - it means reduced margins. (And similar bells are ringing, in, Europe, because the dollar is falling vis-a-vis the Euro.)

Their existing margins are fat and varies from 40% to 20% and sometimes even more than that. So, in its place, with an appreciating rupee and higher salaries, all it means is a reduction in margins - to the level of many other industries. So, in the short run it means slightly lower multiples on stock prices (and hence the reduction in value of ESOPs) and a nice cost cutting theme all around for the companies, but little else.

It can serve as an impetus to move into more value added services, it also means diversifying the basket of currencies (and labour markets). It could mean lower spending on "perks", more variable salaries (a currency component, anyone :-)), tighter bench management - but ultimately if you want to save more, you have to earn more, not necessarily spend less and that, is the obvious key. Also remember, it is not just the rise of the rupee - it really is about the fall of the dollar - not necessarily the Euro (so, there are a few shades of grey there)

My question is, Chinas currency is sort of artificially pegged to the dollar - so effectively, the dollar fall does not mean anything to them? So, what happens to the IT companies who have opened the branches there? Can Chinas currency be used to hedge some of the risk? This, really is the smaller question, but the larger question is, what next?

1 comment:

Anonymous said...

IT companies have already noticed this China angle;for eg. in Cognizant,the strategy is to ensure atleast 30% of revenues come from china - for each vertical! pretty sure other companies are already doing similar things.