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CONTRIBUTOR NAME: DR. DEEPAK JAIN

Research Paper

on

“EFFECTS OF FLUCTUATION IN DOLLARS ON IT COMPANIES”

AREA: FINANCE

DESIGNATION: LECTURER (MARKETING),

COLLEGE OF MANAGEMENT,

SCHOOL OF BUSINESS,

SHRI MATA VAISHNO DEVI UNIVERSITY, J&K, INDIA

POSTAL ADDRESS: DR. DEEPAK JAIN (LECTURER)

C/o SH. S.K. JAIN,

64/2, K.K. GUPTA LANE,

TRIKUTA NAGAR, JAMMU TAWI (J&K) – 180018

EMAIL ADDRESS: [email protected]

PHONE NUMBER: 09419112922

mailto:[email protected]

EFFECTS OF FLUCTUATION IN DOLLARS ON IT COMPANIESDr. Deepak Jain (Lecturer, Shri Mata Vaishno Devi University, J&K, INDIA)

Exchange rate is a key determinant in international finance and turning of world into a Global village. Different factors at macro-economic environment were identified and studied that affects demand and supply of a currency and in return affects the exchange rate. Some identified factors are: Interest Rates, Rate of Inflation, Political or Military Unrest, Domestic Financial Market, Strong Domestic Economy, Business Environment, Stock Markets, Economic data, Balance of trade, Government budget deficits/surpluses, and Rumours. Recently another factor added is “Terrorism”.

Paper discusses the merits and demerits of rupee getting appreciated or depreciated. The main reason for the INR's appreciation since late 2006 has been a flood of foreign-exchange inflows, especially US dollars. The paper tries to identify the correlation between fluctuations of exchange rate on turnover of Indian based IT companies. Analysis was conducted on 12 different Indian IT companies. As the objective is to find out whether the fluctuation in exchange rate of dollars affects the turnover of the IT sector, correlation technique was used.

Positive correlation is seen between the fluctuations in Exchange rate of dollars (acting as independent variable) and revenue value (acting as dependent variable) as the average correlation value of 12 IT companies is 0.690423305 which is higher than 0.5 representing the overall impact of exchange risk on IT industry. The companies are not seems to be taking hedging risk cover which is reflected in their decrease in revenues.

Keywords Exchange Rate, Forex Markets, Inflation, Demand & Supply, Revenue, Turnover, RBI, US$, Interest Rates, Currency, Stock Markets, and Economies etc.

Introduction Exchange rate is a key determinant in international finance and turning of world into a Global village has just made this variable all the more important. Forex markets have undergone many changes from setting up of Bretton Woods System in 1944 according to which each country had to fix its currency exchange rate plus or minus 1 percent to its abandonment in 1984 due to increased Balance of Trade deficit of U.S. Then it has witnessed East Asian crisis of 1997 when majority of the currencies of East Asian countries depreciated.

Now most of the countries follow a free floating exchange rate system. India's approach can be characterized as intermediate since it follows a system between a freely floating and fully managed system. This type of system is known as managed float system. Exchange rates are allowed to float freely, but RBI intervenes when it feels necessary in the way it considers suitable. For e.g. in order to curb appreciation of INR, it may buy US$ from the market or it may increase the interest rates.

Price determination The Forex market like any other market is essentially governed by the law of supply and demand. According to the law of supply, as prices rise for a given commodity (in this case currency), the quantity of the item that is supplied will increase; conversely, as the price falls, the quantity provided will fall. The law of demand states that as the price for an item rises, the quantity demanded will fall. As the price for an item falls, the quantity demanded will rise. In the case of currency, it is the demand and supply of both domestic and foreign currency that is considered. It is the interaction of these basic forces that results in the movement of currency prices in the Forex market.

Factors affecting the demand and supply There are various factors in a macro-economic environment which affect the demand and supply of a currency and in return affects the exchange rate.

Interest RatesIf there are higher interest rates in home country then it will attract investments from abroad in the form of FII, FDI and increased borrowings. This leads to increased supply of foreign currency. On the other hand, if the interest rates are higher in the other country, investments will flow out leading to decreased supply of foreign currency.

Rate of InflationIf inflation rates are high, central bank will have to reduce the supply of domestic currency in order to curb it. This would ultimately lead to strong currency and vice versa.

Political or Military Unrest All exchange rates are susceptible to political instability and anticipations about the new government. All the market players get worried about the policies and may start unwinding their positions thereby affecting the demand and supply.

Domestic Financial Market Strong domestic financial markets will also lead to the strengthening of domestic currency as investors will be less worried about their investments and vice versa.

Sound Domestic EconomyIf the domestic economy is strong then there will be lots of investments from abroad which will lead to increased supply of foreign currency, ultimately leading to strengthening of domestic currency; and vice versa is also true if there domestic economy is weak.

Business EnvironmentPositive indications (in terms of government policy, competitive advantages, market size, etc.) increase the demand for currency, as more and more enterprises want to invest there. Any positive indications abroad will lead to strengthening of foreign currency.

Stock MarketsThe major stock indices also have a correlation with currency rates as investors link the growth in markets to the economic growth of a country.

Economic dataEconomic data such as labour reports (payrolls, unemployment rate and average hourly earnings), Consumer Price Indices (CPI), Gross Domestic Product (GDP), International Trade, Productivity, Industrial Production, Consumer Confidence etc, also affect fluctuations in currency exchange rates.

Balance of tradeIf the exports to other countries are more than the exchange rate will be stronger as there will be inflow of foreign currency. More one relies on imports, weaker will be the exchange rate because there will be outflow of domestic currency. A large, consistent government deficit will lead to outflow of domestic borrowing.

Government budget deficits/surplusesIf a government runs into deficit, it has to borrow money (by selling bonds). If it can't borrow from its own citizens, it must borrow from foreign investors. That means selling more of its currency, increasing the supply and thus driving the prices down.

RumoursAny rumour in the markets also leads to fluctuation in the values. Any favourable news will lead to strengthening of domestic currency and any negative rumour will lead to weakening of the currency.

Terrorism Instances of Afghanistan war and 9/11 attack on World Trade Centre of America affected the trades between America and Asian countries.

To understand how the currency risk plays out, let us consider a hypothetical outsourcing contract between a US based buyer (functional currency is US$) and a supplier with India based service delivery (functional currency is INR) with the following contract specifics:

Start date: 2003 Term of contract: 5 years Total Contract Value (TCV): US$50 million with equal annual payouts

Let us assume for the sake of simplicity, that the supplier bears all the currency exchange risk. Under such a scenario, the supplier in 2003 is facing five years of paying out wages and other costs in INR; therefore, the supplier is "short" the rupee. At the same time, the supplier is holding an accounts receivable of five years of revenues in dollars; therefore, it is "long" the dollar. Being long the dollar and short the rupee, the supplier is hurt when the rupee rises relative to the dollar. Given the rupee appreciation that we have seen over the last five years, under such an agreement, the supplier would have experienced INR 94 million currency exchange loss if you compare the actual realized fee versus the expected supplier fees. This translates into a net negative currency impact of four percent on the top line (see Exhibit 1).

Exhibit 1: Impact of rupee appreciation on supplier fees (hypothetical case)

This is a lose-lose situation for the buyer and supplier because while the buyer pays out as per the contract, the supplier margins are hurt, which may result in a drop in quality of service and lack of investment in continuous improvement.

In 1999, Goldman Sachs (BRIC Report) predicted that India's GDP at current prices will overtake that of France and Italy by 2020 and that Germany, UK and Russia by 2025. By 2035, India is expected to be of 3rd largest economy in the world behind US and China overtaking Japan. Goldman Sachs had made these predictions based on India's expected growth rate of 5.3% to 6.1% in various periods in the past, at present India is registering 8.6% growth rate. Jim O'Neal, head of the Global Economics Team at Goldman Sachs, had said on the BBC, "In thirty years, India's workforce could be as big as that of the United States and China combined". He added that "India could overtake Britain and be the world's fifth largest economy within a decade as the country's growth accelerates".

Presently, India is the third largest economy in the world as measured by Purchasing Power Parity (PPP) and twelve largest in the world as measured in US$ exchange-rate terms, with a GDP of US $1.0 trillion. Amongst the major economies of the world, India is the second fastest growing economy with a GDP growth of 9.4% for fiscal year 2006-2007 and 8.6% in current year. The main reason for this is its diverse economy which encompasses agriculture, handicrafts, textile, manufacturing and a multitude of services.

However, the BRIC (Brazil, Russia, India, China) report ignored the effect of rapid decline in Purchasing Power Parity ratios of economies as they approach maturity, resulting in PPP that eventually tends toward 1.0 (as compared to nearly 5.0 for India and China in this current year i.e. the value of 1 US$ in India and China after conversion into local currency at currency exchange rates was 5 times of that in the US due to their cheaper currencies).

This decline is attributed to the following: Inflation Appreciation of the local currency

Normally, currencies appreciate when the economies are doing well and the rise in their value is a cause for celebration. The high value of the Deutsche Mark when Germany was the trendsetter for the world economy in the 1960s and the 1970s, the high value of yen in the 1980s when Japan seemed set to take over the world and the dollar's high value in the late 1990s when the US economy brooked no competition were sources of immense pride for their respective countries.

The Indian journey from 1990s to the mid 2000s: The Indian rupee (INR) has appreciated by nearly 10% since late 2006, posing an acute dilemma for Indian policymakers. In some ways, the present strength of the currency, this is now hovering just above the symbolic Rs. 40: US $1 exchange rate is an enviable position. It suggests that the country's attractiveness to foreign investors is increasing and signals optimism about the future of Indian economy in general. However, the concerns of export intensive corporations, who have a crucial role of India's economic resurgence, and whose goods become more and more expensive for overseas buyers need to be examined critically and addressed in a timely and effective manner.

The recent strengthening of the rupee is a dramatic departure from the past trends. The currency depreciated steadily for a decade after being floated in 1993, dropping from an average annual rate of Rs. 31.37: US $1 in the 1993-94 fiscal years (April-March) to Rs. 48.40: US $1 in 2002-03 (an average annual depreciation of nearly 5%). Between 2003-04 and 2005-06, however, the rupee appreciated against the dollar by 3% an on average a year—although there was considerable two-way movement of the rupee from month to month. The trend of steady month-on-month appreciation began in September 2006 and has been continuous since then.

Although the Indian rupee-US dollar exchange rate has a significant impact on the Indian economy and business sector, the rupee has also appreciated against other currencies as well. In January-July 2007, the rupee's value in terms of Pounds, Euros and Yen rose by 8%, 6.9% and 11.2%, respectively. According to the Reserve Bank of India (RBI) during 2005-06, 86% of Indian exports and 89% of imports were invoiced in US dollars. The Euro was a distant second, with shares of 8% in exports and 7% in imports.

Background for Research WorkIntroductionThe global devaluation of the U.S. dollar against other currencies is a major cause of concern for the outsourcing industry all over the world. The impact of the weakening of the dollar against currencies of major outsourcing destinations, particularly India, has actually overshadowed other serious concerns like wage inflation. Let us review the impact of these currency movements and wage inflation on the outsourcing business in leading offshore destinations.

IndiaThe Indian rupee has significant strengthened over the last year against the U.S. dollar, falling from 45 rupees to 39 rupees per dollar. This huge strengthening of 13 percent coupled with significant pay increases has shaved part of the Indian cost advantage. Further, most economists are expecting further strengthening of the Indian rupee in 2008, which not happened because of world recession.

The outsourcing businesses hit hardest by the dollar's slide as small and midsize Indian programming companies not have any option of shifting work around the world. Many of them work with a limited number of clients under contracts often fixed at rates for a year or more.

The rupee appreciation impacts BPO companies more than it does to IT companies. One percent rise in the value of the rupee against the dollar has a 75 to 80 basis points impact on the operating margins for BPO companies, unlike IT companies where the impact is about 40 basis points. This is due to the fact that a significant chunk of expenses for BPO companies remain in India while IT companies have some expenses in dollars due to onsite sales force and development centres in other countries.

Many North American and European companies that started their own offshore set-up in India to lower the cost of product development or back-office struggled due to spiralling costs, rising attrition, lack of integration and management support. In fact, the rupee's appreciation against the dollar has claimed its first victim in the business process outsourcing space. US-based Spectrum Global Fund Administration that provides back-office operations to hedge funds in the U.S. and the U.K. is closing its facilities in India. The company had started its operations there only two years ago.

In an effort to combat these threats, Indian outsourcing giants in the technology sector, such as Tata Consultancy Services, Wipro and Infosys Technologies, hedged their bets by expanding in countries such as China where costs are lower. Further, these companies expanded business with European and Latin American countries whose currencies stayed relatively stable compared with the rupee. Indian IT giants had already set up base in Latin American and East European nations to capture the emerging near shoring trend.

The domestic IT-BPO firms have devised many strategies to combat the approximately 15 percent annual climb in wages. Some of the strategies include hiring fresher’s, students with non-engineering backgrounds, establishment of operations in tier-II and tier-III cities, increased billing and employee utilization rates, and improving the business mix to increase productivity and to beat the heat of the rising salaries. Industry analysts believed that with these strategies, coupled with an indexed wage differential, the IT-BPO firms should be able to retain their competitive edge in outsourcing for at least another 10-15 years.

The currency appreciation of major outsourcing destinations is indeed a cause of concern and is expected to erode the attractiveness of these destinations as a preferred outsourcing destination. The currency appreciation, coupled with wage inflation in many of these destinations, has already started taking its toll on both large and small players in IT and BPO industries. Leading companies in these nations have already started establishing new centers in nations where wage growth is still under control and currency movements are relatively stable. Although countries like India still hold an advantage over others, the forecasted trend of the weakening dollar and spiraling salaries does not provide a good picture for these outsourcing destinations.

Objectives of Study1. To find out the reason behind the fluctuation in dollars by studying the past trend. 2. To find out whether the fluctuation in dollars over rupee affects revenue turnover of IT

companies, or not. 3. To find whether the hedging technique can proves as solution in handling the exchange financial

risks in the IT industry.

Time period considered to studyTime period taken into consideration is from April 2006 to October 2007. There are mainly three reasons behind choosing the time period:

2008 world recession impacted the trade, globally. India does not enjoy any exemption from impact of world recession.

Time period considered had seen extremes value of dollar, highest of Rs. 46.5 as well as lowest of Rs. 39.5.

As we know that the exchange risk is not only the factor affecting the revenues of export companies. There are many factors contributing the shrinkage of revenue of IT firms already explained that affects value of revenue generation in different period of time. In selected period, almost all the IT companies showed similar kind of revenue generation.

Research MethodologyResearch Design Research design can be defined as the plan and structure of inquiry, formulated in order to obtain answer to research question on business aspects. It constitutes the overall program of the business research process. Research design used in this research work is both exploratory and causal research.

Exploratory research design is used to answer the Objective Number 1: To find out the reason behind the fluctuation in exchange rate by studying the past trend.

Causal research design is used to answer the Objective Number 2: To find out whether the fluctuation in exchange rate affects revenue turnover of IT company,

or not.

Dependant and independent variables: A variable is a concept that take on different quantitative values like height, weight, age and so on. If a variable is dependent on the result of some other variable it is then called a dependent variable. An independent variable is one that is not dependent on any other variable with reference to that particular study. In this paper, independent variables are fluctuation in exchange rate of dollor and the dependent variable is the foreign revenue turnover in Rupee.

Nature of Data Research is based on secondary data available in form of books, articles, jounals and stock indexes. 12 india based IT companies were surveyed to answer the Research Objective No.: 2

As the objective is to find out whether the fluctuation in exchange rate affects the revenue turnover of the IT sector, correlation technique was used for data analysis.

Objective1: To find out the reason behind the fluctuation in dollars by studying the past trend.Consider a situation where an Indian company moves in software deal with American company, America based company will pay $100 billion (Rs. 1000 crore in Indian currency). It must be noted that when they entered in deal, the exchange rate value of $1 was Rs. 46.

After 1 year, at the time of delivery of software, rupees appreciates against dollar, assume $1 = Rs. 42. Based on current exchange rate, Indian company will receive amount less by 4000 Cr. and suffers heavy Losses. Inference is drawn that rupee appreciation will create loss for Indian based software company.

Reason why the Indian rupee appreciated? The main reason for the INR's appreciation since late 2006 has been a flood of foreign-exchange inflows, especially US dollars. The surge of capital and other inflows into India has taken a variety of forms, ranging from FDIs to remittances sent home by Indian expatriates. In each case, the flow seems unlikely to slacken. The main impact of these various types of flows is examined below:

Foreign Direct Investment (FDI) India's outstanding economic growth has created a large domestic market that offers promising opportunities for foreign companies. Moreover, the country's rising competitiveness in many sectors has made it an attractive export base. These factors have boosted FDI inflows into the country. For example, in 2006-07, FDI amounted to around US $16bn, almost three times the previous year's figure. More than half of these inflows arrived in the final four months of the fiscal year (December 2006-March 2007).

External Commercial Borrowings (ECBs) Indian companies have borrowed enormous amounts of money overseas to finance investments and acquisitions at home and abroad. India's balance-of-payments data reveals that inflows through ECBs amounted to an enormous US $12.1bn during April-December 2006, a year-on-year jump of 33%. The flood of borrowed money is likely to grow in 2007. In the first three months of the year, Indian companies have notified the RBI of their plans to raise nearly US $10bn in overseas debt markets.

Foreign portfolio inflowsIndia's booming stock market embodies the confidence of investors in the country's corporate sector. Foreign portfolio inflows have played a key role in fuelling this boom. Between 2003-04 and 2006-07, the net annual inflow of funds by Foreign Institutional Investors (FIIs) averaged US $8.1bn. Trends during the first five months of 2007 indicate that this flood is continuing, with net FII inflows amounting to US $4.6 billion. Another major source of portfolio capital inflows has been overseas equity issues of Indian companies via Global Depositary Receipts (GDRs) and

American Depositary Receipts (ADRs). Inflows from GDRs and ADRs amounted to US $3.8bn in 2006-07, a year-on-year increase of 48%.

Investments and remittancesIndians settled in other countries have also been a major source of capital inflows, with many non-resident Indians (NRIs) investing large amounts in special bank accounts. While NRIs emotional connection to their country of origin is part of the explanation for this, the attractive interest rates offered on such deposits have also provided a powerful incentive. In 2006-07, NRI deposits amounted to US $3.8bn, a 35% increase over the previous year; the outstanding value of NRI deposits as of end-March 2007 was US $39.5bn. Another large source of foreign-exchange inflows has been remittances from the huge number of Indians working overseas temporarily. Such remittances amounted to a colossal US $19.6bn in April-December 2006, a 15% year-on-year increase.

Is it is advantageous to have appreciating rupee always?No it is not always advisable to have always appreciating rupee. It must be another way round also. Reasons why it is preferred to have appreciating rupee value.

Foreign debt serviceAppreciation of the rupee helps in easing the pressure, related to foreign debt servicing (interest payments on debt raised in foreign currency), on India and Indian companies. With Indian companies taking advantage of the United States soft interest rate regime and raising foreign currency loans, known as external commercial borrowings (ECBs), this is a welcome phenomenon from the point of view of their interest commitments on the loans raised. This will help them avoid taking a bigger hit on their bottom-line, which is beneficial for its shareholders.

Outbound tourists/student bonanzaThe appreciating rupee is a big positive for tourists travelling or wanting to travel abroad. Considering that the rupee has appreciated by over 10% against the US dollar since mid-2002, travelling to the US is now cheaper by a similar quantum in rupee terms. The same applies to students who are still in the process of finalizing their study plans abroad. For example, a student's enrolment for a $1,000 course abroad would now cost only Rs.44, 000 instead of the earlier Rs 49,000.

Government reservesConsidering that the government has been selling its stake aggressively in major public sector units in the recent past, and with a substantial chunk of this being subscribed by FII’s, the latter will have to invest more dollars to pick up a stake in the company being divested, thus aiding the governments build up of reserves.

Reasons why it is not preferred to have appreciating rupee value.

Exporters' disadvantageThe exporters are at a disadvantage owing to the currency appreciation as this renders their produce expensive in the international markets as compared to other competing nations whose currencies haven't appreciated on a similar scale. This tends to take away a part of the advantage from Indian companies, which they enjoy due to their cost competitiveness. However, it must be noted that despite the sharp currency appreciation in recent times, Indian exports have continued to grow. This is vindicated from the fact that while in the month of February 2004, India's exports were higher by 35% over the same month previous year, in the first 11 months of the current fiscal, Indian exports have been higher by 15% year-on-year.

Dollar denominated earnings hurtThe strengthening rupee has an adverse impact on various companies/sectors, which derive a substantial portion of their revenues from the US markets (or in dollar denominations). Software and BPO are typical examples of the sectors adversely impacted by the appreciation of rupee.

Data Analysis & Interpretations

Apr/06

May

/06

Jun/06

Jul/0

6

Aug/06

Sep/06

Oct/06

Nov/06

Dec/06

Jan/07

Feb/07

Mar/

07

Apr/07

May

/07

Jun/07

Jul/0

7

Aug/07

Sep/07

Oct/07

36

38

40

42

44

46

48

44.945.4

46 46.2 46.545.7 45.5

44.9 44.844.3 44.2 44

42.2

40.7 40.8 40.4 40.840.3

39.5

Figure1: Variation in Value of Rupee Against $

Months

Rup

pee

per

1U

SD

Apr/06

May

/06

Jun/06

Jul/0

6

Aug/06

Sep/06

Oct/06

Nov/06

Dec/06

Jan/07

Feb/07

Mar/

07

Apr/07

May

/07

Jun/07

Jul/0

7

Aug/07

Sep/07

Oct/07

0

2000000000

4000000000

6000000000

8000000000

10000000000

12000000000

14000000000

16000000000

10979944048

9660232171

7631264173

9530559432

13799140987

12008705530

10985709752

6465767812

4627487104

3937612119

2107681409 2210198537

3289317532 3067227407

1653055009

3466251344

2202129447

3248718273

185596620

Figure2: Aftek Computers Ltd.

Months

Turn

over

in R

uppe

es

There exists high degree of positive correlation between fluctuation in exchange rate and revenue turnover i.e. 0.793.

This infers that revenue turnover of Aftek Computers is affected by 79.3% because of fluctuation in exchange rate.

CorrelationsExchange Rate Revenue Turnover

Exchange Rate

Pearson Correlation 1 .793**Sig. (2-tailed) .000

N 19 19

Revenue Turnover

Pearson Correlation .793** 1Sig. (2-tailed) .000

N 19 19**. Correlation is significant at the 0.01 level (2-tailed).

0

5000000000

10000000000

15000000000

20000000000

25000000000

30000000000

35000000000

40000000000

45000000000

19343184965

18715493047

28031574936

33187016506

39096129278

40396617276

25152130990

21092246495

33052878781

30176122837

16209046179

25501467909

19962285896

1098024938511781532480

18684715340

19711450578

13736975830

11630281584

Figure3: INFOSYS

Months

Tota

l tu

rnov

er i

n (

Rs.)


This infers that revenue turnover of Infosys is affected by 76.7% because of fluctuation in exchange rate.

0

2000000000

4000000000

6000000000

8000000000

10000000000

12000000000

7519573186

5969400779

6429868218

11091703588

11358497887

7257036657

6646799909

5545469812 5547330775

6276745421

6860803142

5144670406

5681572609

4311629503

30465622713358894818

4922071205

4434513667

3075678270

Figure4:Tata Consultancy Services

Months

Turn

over

s in

Rup

pees


This infers that revenue turnover of TCS is affected by 79.7% because of fluctuation in exchange rate.


Exchange Rate


N 19 19

Revenue Turnover




Exchange Rate


N 19 19

Revenue Turnover




This infers that revenue turnover of Wipro is affected by 86.4% because of fluctuation in exchange rate.

0

500000000

1000000000

1500000000

2000000000

2500000000

3000000000

3500000000

4000000000

463904206

991565269

383430426

2623231704

3560753809

1177410836

949356636

1073808544

770635836

389137594

622704766

991241540

574781814

689903450

376934053

764443258 706222936

400005739294390007

Figure6: Polaris Software Lab Ltd.

Months

Turn

over

in R

uppe

es


This infers that revenue turnover of Polaris Softwares Lab Limited is affected only by 52.8% because of fluctuation in exchange rate.

0

5000000000

10000000000

15000000000

20000000000

25000000000

30000000000

19029204308

13886145289

15684050286

24127075849

26593533104

22762187906

19969849085 18915090909

8493228790

5710470477

6742531754

2476742597

34429013504198604793

2982295897

5563505543

3584450500

1048317875 895932735

Figure7: Mastek Softwares Ltd.

Months

Turn

over

s in

Rup

pees


Exchange Rate


N 19 19

Revenue Turnover




Exchange Rate


N 19 19

Revenue Turnover




This infers that revenue turnover of Mastek Softwares Linited is affected by 83.1% because of fluctuation in exchange rate.

0

2000000000

4000000000

6000000000

8000000000

10000000000

12000000000

4187626062

2937285474

1815413514

2774140286

10152493322

6869243313

4323724483

3064409125

2069344239

1439809758 1380014996

2444031305

3721535225

4575421387

1105012417

1926790676

1032617367

709707863528937586

Figure8: Hexaware Technologies Ltd.

Months

Turn

over

in R

uppe

es


This infers that revenue turnover of Hexaware Technologies Limited is affected by 51.9% because of fluctuation in exchange rate.


This infers that revenue turnover of CMC Ltd is affected by 64.9% because of fluctuation in exchange rate.


Exchange Rate


N 19 19

Revenue Turnover




Exchange Rate


N 19 19

Revenue Turnover




Exchange Rate


N 19 19

Revenue Turnover



0

1000000000

2000000000

3000000000

4000000000

5000000000

6000000000

7000000000

8000000000

9000000000

1025650571

2994952763

2791973878

3379920881

7622917235

4909325131

2702600602

1609597689

1003803420 1026296865

2289192314

1411406404 1253705359

14366174811471479728

3634389603

2972467716

1479595919

1000328438

Figure10: HCL Technologies Ltd.

Months

Turn

over

in R

uppe

es


This infers that revenue turnover of HCL Technologies Ltd is affected by 41.8% because of fluctuation in exchange rate.

0

500000000

1000000000

1500000000

2000000000

2500000000

1449344861

1080244041

905325178

1325866099

2122549804

748022016

877027912

668885137

799380597

606912747

147176569

354310391494344837

370105529

401055719

217933544

481592551392206447

201861845

Figure11: Patni Computer Systems (P) Ltd.

Months

Turn

over

in r

uppe

es


This infers that revenue turnover of Patni Computers (P) Ltd is affected by 71% because of fluctuation in exchange rate.


Exchange Rate


N 19 19

Revenue Turnover




Exchange Rate


N 19 19

Revenue Turnover



0

5000000000

10000000000

15000000000

20000000000

25000000000

30000000000

35000000000

40000000000

45000000000

25301398938

2451445239424648316900

38530494040

39963498247

35801602322

32179872246

19373368636

22034854910

22034854910

27061354437

15530498478

11957091363

19541374597

18474826187

22294443088

14758107133

11555526857

13925949228

Figure12: Satyam Computer Services Ltd.

Months

Turn

over

in R

uppe

es


This infers that revenue turnover of Satyam Computers Services Ltd is affected by 75.3% because of fluctuation in exchange rate.

0

100000000

200000000

300000000

400000000

500000000

600000000

700000000

800000000

131199917

129708800

296682811

704390913

742495523

323072635

407647674

504118285

400295832

392724552

373941371332600525

255675098

417249203

111285674

176548950

99960542

73904590 26576118

Figure13: Nucleus Software ltd.

Months

Tur

nove

r in

Rup

pees


This infers that revenue turnover of Nucleus Software Ltd is affected by 65.7% because of fluctuation in exchange rate.


Exchange Rate


N 19 19

Revenue Turnover




Exchange Rate


N 19 19

Revenue Turnover



Analysis Summary

Objective2: To find out whether the fluctuation in exchange value of dollars affects revenue turnover of IT company, or not.

Figure1 shows variation in value of rupee against 1 US$. Figure2-13 shows the change in the terms of revenue generation over the selected period of time. It can be noted from Table1 that as the value of dollar is highest in August 2006, all company’s revenue turnover is also maximum in the same month, except that of Infosys.

Table1 also reveals that as the value of dollar is lowest in October 2007, even then only 6 companies suffer maximum losses in the month of October 2007. Six other companies have lowest turnover in different months where value of dollar is better if compared with that of October 2007.

One must note that impact of different external variables present at both macro and micro level cannot be ignored while making interpretation. We can further interpret that though the turnover of those six companies may not be lowest in October 2007 when value of dollar is lowest, but there turnover reduced significantly if compared with there highest turnover value during the period of study. This trend simply favours and proves that the fluctuation in dollars has a severe impact on the IT industry.

Positive correlation is seen between the fluctuation in dollars (acting as independent variable) and revenue value (acting as dependent variable) as the average correlation value of 12 IT companies is 0.690423305 which is higher than 0.5 representing the overall impact of exchange risk on IT industry.

Objective3: To find whether the hedging technique can proves as solution in handling the exchange financial risks in the IT industry.The hedging techniques used by Major IT giants are not sufficient to handle the currency exchange risk. It means the predictions of amount of exposure to the exchange risk for which the hedging option are taken are less than what actually faced.

Suggestions

MONTH Table1: Foreign Revenue Turnover (in Rupees)…contd..$ Value AFTEK INFOSYS TCS WIPRO POLARIS MASTEK

Apr-06 44.9 10979944048 19343184965 7519573186 8685955743 463904206 19029204308May-06 45.4 9660232171 18715493047 5969400779 8683481311 991565269 13886145289Jun-06 46 7631264173 28031574936 6429868218 7538971790 383430426 15684050286Jul-06 46.2 9530559432 33187016506 11091703588 8905597889 2623231704 24127075849

Aug-06 46.5 13799140987 39096129278 11358497887 9732301123 3560753809 26593533104Sep-06 45.7 12008705530 40396617276 7257036657 5960749713 1177410836 22762187906Oct-06 45.5 10985709752 25152130990 6646799909 4627134996 949356636 19969849085Nov-06 44.9 6465767812 21092246495 5545469812 5126679386 1073808544 18915090909Dec-06 44.8 4627487104 33052878781 5547330775 5316744258 770635836 8493228790Jan-07 44.3 3937612119 30176122837 6276745421 5171470031 389137594 5710470477Feb-07 44.2 2107681409 16209046179 6860803142 4658310328 622704766 6742531754Mar-07 44 2210198537 25501467909 5144670406 6040409835 991241540 2476742597Apr-07 42.2 3289317532 19962285896 5681572609 3981111110 574781814 3442901350May-07 40.7 3067227407 10980249385 4311629503 4186674755 689903450 4198604793Jun-07 40.8 1653055009 11781532480 3046562271 2726008230 376934053 2982295897Jul-07 40.4 3466251344 18684715340 3358894818 2296473466 764443258 5563505543

Aug-07 40.8 2202129447 19711450578 4922071205 2286685248 706222936 3584450500Sep-07 40.3 3248718273 13736975830 4434513667 1954909436 400005739 1048317875Oct-07 39.5 185596620 11630281584 3075678270 2159567240 294390007 895932735

Correlation 0.793293886 0.766382615 0.796693709 0.864349643 0.527763087 0.83124443AverageTurnover 5845084142 22970600015 6025201164 5265222941 937045390.7 10847690476Lowest / Highest

Turnover185596620 / 13799140987

10980249385 /40396617276

3046562271 / 11358497887

1954909436 / 9732301123

294390007 / 3560753809

895932735 / 26593533104

Degree of Correlation High High High High Moderate High

MONTH

Table1: Foreign Revenue Turnover (in Rupees) DOLLA

RVALUE

HEXAWARE CMC HCL PATNI SATYAM NUCLEUS

Apr-06 44.9 4187626062 257152826 1025650571 1449344861 25301398938 131199917May-06 45.4 2937285474 473628558 2994952763 1080244041 24514452394 129708800Jun-06 46 1815413514 182718078 2791973878 905325178 24648316900 296682811Jul-06 46.2 2774140286 328644792 3379920881 1325866099 38530494040 704390913

Aug-06 46.5 10152493322 953061823 7622917235 2122549804 39963498247 742495523Sep-06 45.7 6869243313 396202001 4909325131 748022016 35801602322 323072635Oct-06 45.5 4323724483 304608913 2702600602 877027912 32179872246 407647674Nov-06 44.9 3064409125 396202001 1609597689 668885137 19373368636 504118285Dec-06 44.8 2069344239 304608913 1003803420 799380597 22034854910 400295832Jan-07 44.3 1439809758 111971789 1026296865 606912747 22034854910 392724552Feb-07 44.2 1380014996 155946533 2289192314 147176569 27061354437 373941371Mar-07 44 2444031305 30520041 1411406404 354310391 15530498478 332600525Apr-07 42.2 3721535225 99088296 1253705359 494344837 11957091363 255675098May-07 40.7 4575421387 66863191 1436617481 370105529 19541374597 417249203Jun-07 40.8 1105012417 135032798 1471479728 401055719 18474826187 111285674Jul-07 40.4 1926790676 58861291 3634389603 217933544 22294443088 176548950

Aug-07 40.8 1032617367 38096352 2972467716 481592551 14758107133 99960542Sep-07 40.3 709707863 182000421 1479595919 392206447 11555526857 73904590Oct-07 39.5 528937586 84182666 1000328438 201861845 13925949228 26576118

Correlation 0.519423931 0.648995857 0.417719079 0.709928617 0.752749906 0.656534905AverageTurnover 3003029389 239967962.3 2421906421 718112938.1 23130625522 310530474.4Lowest / Highest

Turnover528937586 / 10152493322

30520041 / 953061823

1000328438 / 7622917235

147176569 / 2122549804

11555526857 / 39963498247

26576118 / 742495523

Degree of Correlation Moderate Moderate Moderate Moderate High Moderate

Analysis revealed a positive correlation exists between the independent variable and the dependent variable. Suggestion to companies is that they should use the combination of hedging instruments like Option along with forward hedging instruments to save them against exchange risk and will also help them to raise more debt as hedged firm are considered safer than unhedged firm.

Limitations The study is restricted to only 12 organizations only. Moreover, there are many factors present at both macro and micro level that impacts revenue turnover and there impact cannot be ignored while making interpretation. Analysis was conducted assuming all those factors as constant and studied the impact of fluctuation in dollars on revenue turnover of IT companies.

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*****

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http://ciillibrary.org:8000/ciil/Fulltext/Jounral_of_inforamtion_technology_22_1_2007/Vol_22_4_2007/Article_8.pdf

http://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx

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http://www.arvindmills.com/finance/docs/qtr/0405/Arvind%20Mills%20Annual%20Report%20for%202006-07.pdf

http://www.infosys.com/investor/reports/annual/Infosys_AR06.pdf

http://www.ril.com/rportal/jsp/eportal/ListDownloadLibrary.jsp?DLID=866

http://ssrn.com/abstract=676012

http://www.iief.com/Research/CHAP10.PDF

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