Getting foggy again?

Back in October 2001, N.R. Narayana Murthy, then Infosys CEO, when asked about the future of the Indian it industry, made a prophetic statement: "There's so much fog in the windshield and I don't think anybody has a crystal ball." Murthy was referring to the slowing tech spending in corporate America, and the US invasion of Afghanistan that eventually gave the Indian it industry three torrid years.

With the recently announced quarterly results, it looks like the first wisps of fog are just starting to appear on the windshield of the cruising it industry. And the reason for the fog, this time around, is something very Indian. It's the rising rupee. With the rupee appreciating nearly 7 per cent against the dollar in the last quarter alone, earnings and bottom lines of it companies, whose primary market is the us, have been badly hit. Infosys' revenues took a hit of Rs 287 crore due to the rupee's volatility.

In fact, Infosys lowered its annual guidance for 2007-08. For the year ending March 31, 2008, Infosys expects to have revenues in the range of Rs 16,238-16,443 crore-a year-on-year growth of 16.9-18.3 per cent-significantly lower than the 22.6-26.6 per cent growth it had forecast a quarter ago. The other Bangalore heavyweight Wipro lost Rs 257 crore at the revenue level and Rs 96 crore in profits, due to the appreciating rupee.

At TCS, the shooting rupee ate away into operating margins by 258 basis points, which was somewhat offset by hedging gains of Rs 107 crore. In fact, TCS is among the companies that got its hedging strategy right. Says S.Ramadorai, CEO & MD, TCS: "We will hopefully have some stability in the quarter ahead as far as the rupee is concerned. We have about $2.5 billion in outstanding hedges by the end of the last quarter." Adds Suveer Chainani, Technology Analyst, Macquarie Securities: "TCS has been astute with its foreign currency risk management. They predicted well and had a good mix of futures and options that worked out well for them."

Research houses like Macquarie forecast that by December the dollar may go to Rs 40.5 and touch Rs 41.5 per dollar by December-2008. Ramadorai feels the solution for the current situation lies in concentrating on increasing non-dollar revenues from other geographies like India, Asia Pacific and Latin America.

Another area of concern for the industry is the impending end of tax holidays in 2009. "One way to work around that problem would be to work out of special economic zones (SEZs), which guarantee tax holidays," says Ramadorai. With the run up to the US Presidential elections already in full swing, the IT industry is also bracing itself for "some noise" from the US political circles on prickly issues like h-1b visas and outsourcing.