Moneycontrol
Nov 25, 2016 03:48 PM IST | Source: CNBC-TV18

Geometric sees marginal impact of rupee depreciaiton on IT cos

In an interview with CNBC-TV18, Manu Parpia, MD & CEO of Geometric, said 1 percent depreciation in rupee normally has 0.3-0.4 percent positive impact on margin.

The Indian rupee recorded an all-time low on Thursday by closing at 68.75 level. Weaker rupee aids margins of the IT companies.

In an interview with CNBC-TV18, Manu Parpia, MD & CEO of Geometric, said 1 percent depreciation in rupee normally has 0.3-0.4 percent positive impact on margin.

He expects a marginal impact of the rupee depreciation on IT companies.

Below is the verbatim transcript of Manu Parpia's interview to Reema Tendulkar & Prashant Nair on CNBC-TV18.

Reema: We have seen a fair amount of rupee depreciation. First, could you tell 1 percent rupee depreciation can benefit your margins by how much and second, do you believe you will be able to hold on to those margins. Will it show up in the company\\'s profit and loss (P&L)?

A: One percent rupee depreciation can be between 0.3 and 0.4 percent typically because it depends on onsite offshore ratio. However, keep in mind that the cost in US becomes higher when rupee depreciates. So it doesn\\'t translate very directly. It doesn\\'t come straight to the bottomline.

However, to a certain extent we can expect improvement; there is no doubt but if not that big because there is a lot of blended work that goes on.

Prashant: For the industry if rupee depreciates a lot more and the depreciation is sustained over a period of time and you do gain margin benefits. Is the environment suitable enough for you to be able to keep those gains or you will have to pass it on over the next few quarters in form of lower pricing to clients?

A: It depends on the service you are offering. If your service is highly valuable, you will be able to keep the margin because it is priced by value and not by cost. If your service is commodity type base and you are going on resource augmentation or something like that then more likely you will have to pass on some benefits.

Reema: In the last five years or so, we have seen a fair amount of rupee depreciation perhaps close to about 50 percent or even more than that, but in that five year period the margins of IT companies have come down. So should the next five years be any different considering that the IT companies are going through disruption?

A: That is the different question to the exchange rate. I would anticipate that margins will be under pressure in IT industry. Due to the changes in the structure and those companies which are not able to meet the new needs of customers, will find margins under pressure.

Prashant: Do you believe that the dollar strength is lead by expectations that the US economy will start to pickup and fire on all cylinders?

A: I do not think that is the driver. The driver is the expectation that inflation will rise on account of the fact that there will be more deficit spending in the US which has resulted in interest rate rise and which is resulting in funds flow into the US dollar.

Prashant: Wouldn't deficit spending, on a very large scale, be positive for growth and hence corporate sector in America?

A: Could be, but the current move is driven by interest rates which anticipates that there would be growth but it\\'s not clear whether that growth will be there or not because if protectionism and so forth turns up then inflation may rise but the industry may decline.

Reema: The rupee rate on September 30, if I am not mistaken, was around 66.6. We are already at 68.4-68.5 thereabouts - that\\'s roughly 2.5 percent depreciation. So considering that 1 percent rupee depreciation can at least aid margins by about 30 bps, should the December quarter see a quarter-on-quarter improvement in margins by close to about 70-80 bps at least for Geometric because all the other things like pricing etc have been constant in a span of three months?

A: I expect a very marginal impact, not only in Geometric but in most IT companies because many IT companies prudently cover their flows in the next 30-90 days.

However, for Geometric certainly I wouldn't expect to see any substantial benefit because the hedge flow will decline, so therefore it would be netted out being more or less neutral but over next two-three quarters that would be different.

Prashant: How closely is the Indian IT community watching the kind of people Mr Trump is going for to run his administration? Could you talk to us about that?

A: I think everyone is waiting and watching, not only the Indian IT industry but the American industry as well because not to forget that a lot of multinationals are dependent on L1s and to some extent on H1s too. Therefore, everybody is waiting and watching.
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