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Impact of currency fluctuation on profitability of Indian IT sector
INTRODUCTION:
In the modern competitive world no company is self-sufficient and has to depend upon other company for satisfying their needs and wants. Production of goods and services requires resources and every company have limited resources. The companies have to buy from other firms what it cannot produce or needed for its production and also for smooth flow of activities, sometimes it may have to go abroad to get what it need which gave the birth to the foreign trade. Exchange of goods, services and capital across the international boarder territories is !nown as international trade which is otherwise called as foreign trade. "low of goods, services and capital goods across various national boundaries is possible only if there is a good functioning monetary system in the country. Each country functions as a sovereign state with its own set of regulations and currency which thrown many opportunities and challenges to the companies trading with them. The most important concerns in foreign trade includes the factors such as political and legal issues, economic condition of the host country, currency fluctuation, monetary and fiscal policies of the countries and trade policies. #ost among the above mentioned factors remain constant for a considerable period of time and can be handled with certain careful moves but the only factor which remain most volatile and demands more attention is fluctuation of exchange rates. Every transactions needs to be settled and most of the trade ta!e place for monetary consideration which gave birth to the currency, since each country has its own currency there exist a problem of appropriate exchange rate between the exporter$s currency and the importer$s currency. %urrency fluctuation remains most critical factor in the world$s trade as it has the potentiality to influence the monetary transactions of the parties by varying the profitability to a considerable extent. The disparities between the two currencies arise mainly because of the following factors&
o o o o
capital flows' transport and associated costs' only certain goods being traded' and quotas, import surcharges, tariffs or other government constraints 1
R V Institute of Management
1.1 Introduction to Currency Market:

Everything in the world has a mar!et today. In simple words mar!et can be referred as the place of exchange, earlier the scope of mar!et was limited only to the transactions ta!ing place in physical environment whereas now the concept of mar!et has widen in its scope and included even the virtual transactions too. The most popular mar!ets in the present world include currency mar!et also, currency mar!et otherwise called as the foreign exchange (")* mar!et and "orex mar!et is the world$s biggest mar!et in its si+e and it refers to the mar!et for trading one currency against the other. The foreign exchange mar!et is the most liquid financial mar!et in the world. Every day few trillion worth of currencies are traded, the average daily turnover in the global forex and related mar!et is continuously growing. The important traders in the mar!et include large ban!s, central ban!s, institutional investors, currency speculators, corporations, governments, other financial institutions and retails investors. %urrency is most often referred to the word money. It has originated from the #iddle English word curraunt which means in circulation. Therefore, currency can be referred as the money of any form which is in the circulation. The concept of currency has evolved through four distinct phases namely early currency phase, coinage phase, paper notes phase and ban!note era. Initially, the commodities were exchanged through the barter system where the parties involved in the transactions were exchanging two or more different types of commodities as trade. This system had many loopholes mainly consisting of inappropriate value of exchange. In order to eliminate these loopholes the concept of currency had introduced in trade. In different places everything from teeth to ,ewelry has served this purpose but later metals, and especially gold and silver, were introduced as an accepted means of payment, and also a reliable form of value storage. In the first stage of currency metals were used to represent stored value, and symbols to represent commodities, formed the basis of trade in the "ertile %rescent for over -.// years.
1.2 History of the Forei n !"chan e:

#o$d %tandard %yste& The creation of the gold standard monetary system in -01. mar!s one of the most important events in the history of the forex mar!et. 2efore the gold standard was implemented, countries would commonly use gold and silver as means of international payment. The main issue with using gold and silver for payment is that their value is affected by external supply and demand. "or example, the discovery of a new gold mine would drive gold prices down. The underlying idea behind the gold standard was that governments guaranteed the conversion of currency into a specific amount of gold, and vice versa. In other words, a currency would be bac!ed by gold. This represented the first standardi+ed means of currency exchange in history. The gold standard eventually bro!e down during the beginning of 3orld 3ar I. 4ue to the political tension with 5ermany, the ma,or European powers felt a need to complete large military pro,ects. The financial burden of these pro,ects was so substantial that there was not enough gold at the time to exchange for all the excess currency that the governments were printing off. 'retton (oods %yste& 2efore the end of 3orld 3ar II, the 6llied nations believed that there would be a need to set up a monetary system in order to fill the void that was left behind when the gold standard system was abandoned. In 7uly -899, more than 1// representatives from the 6llies convened at 2retton 3oods, :ew ;ampshire, to deliberate over what would be called the 2retton 3oods system of international monetary management. To simplify, 2retton 3oods led to the formation of the method of fixed exchange rates' The <.=. dollar replacing the gold standard to become a primary reserve currency' and the creation of three international agencies to oversee economic activity& the International #onetary "und (I#"*, International 2an! for >econstruction and 4evelopment, and the 5eneral 6greement on Tariffs and Trade (56TT*.
Impact of currency fluctuation on profitability of Indian IT sector ?ne of the main features of 2retton 3oods is that the <.=. dollar replaced gold as the main standard of convertibility for the world@s currencies' and furthermore, the <.=. dollar became the only currency that would be bac!ed by gold. (This turned out to be the primary reason that 2retton 3oods eventually failed.* "inally, on 6ugust -., -81-, <.=. announced to the world that it would no longer exchange gold for the <.=. dollars that were held in foreign reserves. This event mar!ed the end of 2retton 3oods. Current !"chan e Rates 6fter the 2retton 3oods system bro!e down, the world finally accepted the use of floating foreign exchange rates during the 7amaica agreement of -81A. This meant that the use of the gold standard would be permanently abolished. ;owever, this is not to say that governments adopted a pure free-floating exchange rate system. #ost governments employ one of the following three exchange rate systems that are still used today& 4ollari+ation' Pegged rate' and #anaged floating rate. Do$$ari)ation This event occurs when a country decides not to issue its own currency and adopts a foreign currency as its national currency. 6lthough dollari+ation usually enables a country to be seen as a more stable place for investment, the drawbac! is that the country@s central ban! can no longer print money or ma!e any sort of monetary policy. 6n example of dollari+ation is El =alvador@s use of the <.=. dollar. *e ed Rates Pegging occurs when one country directly fixes its exchange rate to a foreign currency so that the country will have somewhat more stability than a normal float. #ore specifically, pegging allows a country@s currency to be exchanged at a fixed rate with a single or a
Impact of currency fluctuation on profitability of Indian IT sector specific bas!et of foreign currencies. The currency will only fluctuate when the pegged currencies change.
1.+. Current %tatus of Fore" Market:

The foreign exchange mar!et is the largest and most liquid financial mar!et in the world. Traders include large ban!s, central ban!s, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related mar!ets is continuously growing. 6ccording to the B/-/ Triennial %entral 2an! =urvey, coordinated by the 2an! for International =ettlements, average daily turnover was <=CD.80 trillion in 6pril B/-/ (vs C-.1 trillion in -880*. ?f this CD.80 trillion, C-.. trillion was spot foreign exchange transactions and CB.. trillion was traded in outright forwards, ") swaps and other currency derivatives. Trading in Eondon accounted for DA.1F of the total, ma!ing Eondon by far the most important global center for foreign exchange trading. In second and third places, respectively, trading in :ew Gor! %ity accounted for -1.8F, and To!yo accounted for A.BF. Ta,$e 1.1: The ma,or traders in the currency mar!et are as follows' To- 1. currency traders /0 of o1era$$ 1o$u&e2 May 2.123 Rank B D 9 . A Na&e 4eutsche 2an! <2= 65 2arclays %apital >oyal 2an! of =cotland %iti 7P #organ Market share B/.8AF -9..0F -/.9.F 0.-8F 1.DBF ..9DF 5
1 0 8 -/
;=2% %redit =uisse 5oldman =achs 2:P Paribas
9./8F D.D.F D./.F B.BAF
1.4. Market *artici-ants: #o1ern&ents and Centra$ 'anks 6rguably, some of the most influential participants involved with currency exchange are the central ban!s and federal governments. In most countries, the central ban! is an extension of the government and conducts its policy in tandem with the government. ;owever, some governments feel that a more independent central ban! would be more effective in balancing the goals of curbing inflation and !eeping interest rates low, which tends to increase economic growth. >egardless of the degree of independence that a central ban! possesses, government representatives typically have regular consultations with central ban! representatives to discuss monetary policy. 'anks and Other Financia$ Institutions In addition to central ban!s and governments, some of the largest participants involved with forex transactions are ban!s. #ost individuals who need foreign currency for smallscale transactions deal with neighborhood ban!s. ;owever, individual transactions pale in comparison to the volumes that are traded in the interban! mar!et. %-ecu$ators 6nother class of mar!et participants involved with foreign exchange-related transactions is speculators. >ather than hedging against movement in exchange rates or exchanging currency to fund international transactions, speculators attempt to ma!e money by ta!ing advantage of fluctuating exchange-rate levels. R V Institute of Management 6
Impact of currency fluctuation on profitability of Indian IT sector Co&&ercia$ co&-anies :ational central ban!s play an important role in the foreign exchange mar!ets. They try to control the money supply, inflation, and or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabili+e the mar!et.
Non5,ank forei n e"chan e co&-anies :on-ban! foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also !nown as foreign exchange bro!ers but are distinct in that they do not offer speculative trading but rather currency exchange with payments (i.e., there is usually a physical delivery of currency to a ban! account*.
FOREIGN EXCHANGE MANAGEMENT ACT
1.6. 7d&inistration of Forei n !"chan e in India:

RESERVE BANK OF INDIA CENTRAL GOVERNMENT
!T"#RI$%& '%R$#($
)#R%I*( %+," (*% &% -%R $$#,I TI#( #) I(&I
!T"#RI.%& M#(%/ ," (*%R$
!T"#RI.%& &% -%R$
R%$TRI,T%& )!-- )-%&*%
The %entral 5overnment has been empowered under =ection 9A of the "oreign Exchange #anagement 6ct to ma!e rules to carry out the provisions of the 6ct. =imilarly, =ection 91 empowers the >eserve 2an! to ma!e regulations to carry out the provisions of the 6ct and the rules made there under. The "oreign %ontribution (>egulation* 6ct, -81A is to regulate the acceptance and utili+ation of foreign contribution donation or foreign hospitality by certain persons or associations, with a view to ensuring that Parliamentary institutions, political associations and academic and other voluntary organi+ations as well as individuals wor!ing in the important areas of national life may function in a manner consistent with the values of a sovereign democratic republic. It is basically an act to ensure that the integrity of Indian institutions and persons is maintained and that they are not unduly influenced by foreign donations to the pre,udice of India$s interests. The "oreign Exchange #anagement 6ct ("E#6* is a law to replace the draconian "oreign Exchange >egulation 6ct, -81D. 6ny offense under "E>6 was a criminal offense liable to imprisonment' 3hereas "E#6 see!s to ma!e offenses relating to foreign exchange civil offenses. <nli!e other laws where everything is permitted unless specifically prohibited, under "E>6 nothing was permitted unless specifically permitted. ;ence the tenor and tone of the 6ct was very drastic. It provided for imprisonment of even a very minor offense. <nder "E>6, a person is presumed innocent unless he is proven guilty. 3ith liberali+ation, a need was felt to remove the drastic measure of "E>6 and replace them by a set of liberal foreign exchange management regulations. Therefore "E#6 was enacted to replace "E>6. "E#6 extends to the whole of India. It applies to all 2ranches, offences and agencies outside India owned or controlled by a person resident in India and also to any contravention there under committed outside India by any person to whom this 6ct applies. 1.8 I&-act of Forei n !"chan e F$uctuation on Indian IT Co&-anies: R V Institute of Management 0
Impact of currency fluctuation on profitability of Indian IT sector The foreign exchange has the close relationship with Indian Information Technology firms. Indian IT sector found its name mainly because of its export of software and the outsourcing to the rest of the world especially to the <= and Europe. 3hen comes to the settlement of the transactions it had been left with no alternatives other than accepting multi-currency payments which involves many ris!s. 6s it mentioned in the beginning of the chapter, the foreign exchange is very volatile in its nature which can result in varying of profitability to the greater extent. %urrency fluctuation can be a boon or bane to the company operating in the multicurrency, currency fluctuation has emerged as a very real problem to the firms. 6s ma,or portion of businesses of Indian IT industry ta!es place in foreign country the currency fluctuation do benefit only in the long run because it ensures competitiveness for the industry, but in the short run it do not really gain. 4epreciation of the domestic currency always results in positive impact on profitability where the appreciation of the same will cause loss of money. 6s per the results of the survey conducted by the :6==%?#, ?ne per cent depreciation in the rupee has a positive impact of about B.-9/ basis points on the margins of IT companies. 6 depreciating rupee helps IT companies improve their margins as they earn revenues in foreign currency but sudden fluctuations hamper the planning process for companies and increase a company@s exposure to financial ris! and drastically minimi+e savings.
1.9. Forei n !"chan e !"-osure:

"oreign currency exposure is the extent to which the future cash flows of an enterprise, arising from domestic and foreign currency denominated transactions involving assets and liabilities, and generating revenues and expenses are susceptible to variations in foreign currency exchange rates. It involves the identification of existing and or potential currency relationships which arise from the activities of an enterprise, including hedging and other ris! management activities. 1.9.1 Ty-es of Fore" !"-osure: Trans$ation !"-osure R V Institute of Management 1
Impact of currency fluctuation on profitability of Indian IT sector Translation exposure is also referred to as accounting exposure or balance sheet exposure. The restatement of foreign currency financial statements in terms of a reporting currency is termed translation. The exposure arises from the periodic need to report consolidated worldwide operations of a group in one reporting currency and to give some indication of the financial position of that group at those times in that currency. Transaction !"-osure This is also referred to as conversion exposure or cash flow exposure. It concerns the actual cash flows involved in setting transactions denominated in a foreign currency. The existence of an exposure alerts one to the fact that any change in currency rates, between the time the transaction is initiated and the time it is settled, will most li!ely alter the originally perceived financial result of the transaction. It is, for example, important to commence monitoring the exposure from the time a foreign currency commitment becomes a possibility, not merely when an order is initiated or when delivery ta!es place. The financial or conversion gain or loss is the difference between the actual cash flow in the domestic currency and the cash flow as calculated at the time the transaction was initiated, i.e., the date when the transaction clearly transferred the ris!s and rewards of ownership. 3here financing of a transaction ta!es place, such as a loan obligation, there are also gains losses which may result. !cono&ic !"-osure Economic exposure or operational exposure moves outside of the accounting context and has to do with the strategic evaluation of foreign transactions and relationships. It concerns the implications of any changes in future cash flows which may arise on particular transactions of an enterprise because of changes in exchange rates, or on its operating position within its chosen mar!ets. Its determination requires an understanding of the structure of the mar!ets in which an enterprise and its competitors obtain capital, labour, materials, services and customers. Identification of this exposure focuses attention on that component of an enterprise@s value that is dependent on or vulnerable to future exchange rate movements. This has bearing on a corporation@s commitment, competitiveness and viability in its involvement in both foreign and domestic mar!ets. R V Institute of Management 12
Impact of currency fluctuation on profitability of Indian IT sector Thus, economic exposure refers to the possibility that the value of the enterprise, defined as the net present value of future after tax cash flows, will change when exchange rates change. Economic exposure will almost certainly be many times more significant than either transaction or translation exposure for the long term well-being of the enterprise. 2y its very nature, it is sub,ective and variable, due in part to the need to estimate future cash flows in foreign currencies. The enterprise needs to plan its strategy, and to ma!e operational decisions in the best way possible, to optimi+e its position in anticipation of changes in economic conditions.
1.:. Mana e&ent of Fore" !"-osure and Risk:

The approach of an enterprise to the management of foreign currency exposure and ris! is ultimately based on the costs and benefits of alternative strategies. =ome enterprises may adopt a comprehensive system of ris! management, particularly where the extent of exposure is large, or where management has a defensive attitude to ris!. ?n the other hand, the costs of a comprehensive ris! management strategy may outweigh the benefits where the extent of exposure is small, or where management chooses to adopt a speculative approach to exchange rate movements. 3hatever approach is adopted, it is absolutely necessary that the basic philosophy, policies, ob,ectives and organi+ation structure of the enterprise concerning the management of foreign currency exposure and ris! are set at the highest level, formally recorded and communicated, as well as regularly reviewed and modified. %trate ies; techni<ues used to &ana e the e"-osure: The various techniques for managing currency exposure are used, sub,ect to the approval of any exchange control authority, and sub,ect to the availability of the particular technique in the mar!et place. The extent to which the techniques can be employed is also dependent on their commercial practicality in particular situations, as well as on the enterprise@s si+e and negotiating strength.
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Impact of currency fluctuation on profitability of Indian IT sector 3here many companies operate within an overall group of companies, whether they be subsidiaries or associates, the opportunities to apply balancing techniques between companies should always be explored at group level. -. Nettin : This process offsets intra-group transactions (between parent and subsidiary, or subsidiary and fellow subsidiary* in order to reduce transfer values and only reflect and account for the net balance. Typically, a group of companies would modify settlement dates to select a single date for settling the net amount. Each subsidiary still retains the same currency ris!, but a netting system, which offsets and manages exposures centrally, enables cover to be limited to net currency positions. B. =eadin and $a in : 6 mechanism whereby a company accelerates (leads* or
delays (lags* payments or receipts in anticipation of exchange rate movements. This requires an appraisal of both the exchange rates and the interest rates of both countries, since the interest earned on a local currency investment may compensate for any depreciation in that currency. D. %u,stitution: %hanging the source of raw materials, finished products, and or mar!ets operated in, as a reaction to, or in anticipation of, changes in currency relationships. 9. Matchin : The action within an enterprise whereby receipts and payments or loans and investments in the same or correlated currencies are specifically matched so that only the net exposure difference on each transaction date or reporting date needs to be addressed. .. Hed in : This is the general term used for the process of protecting the accountable value of foreign currency monetary assets and liabilities by anticipating future exchange rate movements. Exposure to unreali+ed foreign exchange (translation* losses can be reduced to nil, or to a defined or budgeted amount, by entering into forward exchange contracts or using other hedging instruments, ta!ing due consideration of the cost benefit relationships. It can be R V Institute of Management 12
Impact of currency fluctuation on profitability of Indian IT sector also achieved by HnaturalH hedging, for instance, whereby foreign assets are financed by foreign borrowings, both in the same currency. A. For>ard e"chan e contracts: The HclassicH exposure management technique is the purchase or sale (i.e. covering* of a company@s future currency commitments in the forward mar!ets which exist in all ma,or industrial countries. This technique is normally used for the protection of transaction exposure with a time frame of up to twelve months. It is, however, possible in some currencies to obtain longer periods of cover or to roll over cover arrangements. 2y using a forward exchange contract, the counterparties agree to exchange two currencies at a rate which is fixed at the time the contract is made (the forward rate*, on a specified value date which is more than two business days in the future. 1. For>ard s>a-: ?ften the precise date for the settlement of a transaction is not !nown. The original forward contract, in such cases where it does not coincide with the final transaction date, needs therefore to be extended (or in some cases brought bac!* to the now !nown settlement date. This is done by the simultaneous purchase and sale of a currency for different maturity dates, effectively cancelling the original contract and reinstating it to the new forward date. 0. Currency o-tion: This allows the buyer the right, but not the obligation to purchase (or sell* currency at an agreed price on the expiry date (European* or within a specified option period (6merican*. "or this right, the buyer pays the seller a non-refundable premium. :ormally options and futures, singly or in combination, are used as a stoploss mechanism or can be traded in and out, up to the date they expire. 8. Currency futures contract: =uch a contract gives rise to an obligation to purchase (or sell* a standard amount of a currency at a specified price on a future standard date through an organi+ed exchange. The buyer or seller of a futures contract is required to lodge an initial deposit (margin* with the clearing house of the exchange and this must be left in place for as long as the position is held. In addition, variation margin is received from, or paid to, the clearing house as the R V Institute of Management 13
Impact of currency fluctuation on profitability of Indian IT sector position held generates profits or losses through movements in mar!et prices. "utures contracts are tradeable up to expiry date and may be used in place of forward exchange contracts. -/. Cross5currency s>a-s: The technique whereby two parties with either existing or anticipated liabilities (or assets* in different currencies agree, usually via an intermediary, to exchange (swap* their liabilities (assets* so that the first party would be servicing (receiving the cash flows from* the liability (asset* of the other party and vice versa. %ross-currency swaps may ta!e various forms, but the conventional structures include fixed-to-fixed, floating-to-fixed and floating-tofloating interest rate swaps. 2y executing a cross-currency swap, a borrower may thereby alter or eliminate the exchange ris! for the remaining life of the liability (asset*.
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2.1 Introduction:
3henever the company deals with customer clients of more than one country, the concept of foreign currency and exchange rates comes into picture. . "oreign currency is a currency of another country$s denomination and the exchange rate refers to the rate at which one currency is exchanged with another currency. The concept of flexible exchange rate thrown both fruits and stones to the individuals and entities involved in foreign currencies, one of the main ris!s include the fluctuation in value receivable which is !nown as exchange rate ris!. Every firm involved in multinational operation has the foreign exchange exposure. "orex exposure of a firm measures the sensitivity of its cash flow to changes in exchange rates.
2.2 Re1ie> of $iterature:

The foreign exchange rate exposure of a firmmeasures of the sensitivity of its cash flows to changes in exchange rates. ;owever,since cash flows are difficult to measure, most researchers have examined exposure by studying how the firm$s mar!et value, the present value of its expectedcash flows, responds to changes in exchange rates. Exchange rate exposure certainly has the potentialto be a significant ris! factor for firms. 6s pointed out by 7orion (-88/*, the volatility of exchange rates is substantially larger than that of interest rates or inflation. There have been several empirical studies of the foreign exchange rate exposure of <.=. firms (for example, 7orion (-88/*, 2odnar and 5entry (-88D*, 6mihud (-889*, %hoi and Prasard (-88.*, 5riffin and =tul+ (-881*, and 6llayannis (-881**. #ost of the studies have typically found low or negligible levels of exposure for most firms, even when the firms examined have significant foreign operations. :one of these studies were based explicitly on a model of firmbehavior, however, so it is difficult to interpret their findings of low exposure in terms of economic behavior.
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Impact of currency fluctuation on profitability of Indian IT sector 7orion (-88/* examined <.=. multinational firms and found that only .F of them exhibit significant exposures. 6lthough the evidence for firms domiciled in other countries was somewhat stronger, it was still relatively wea!. ;e and :g (-880* and 5laum, 2runner and ;immel (B//-* investigated 7apanese and 5erman firms, respectively, and found a greater relation between stoc! returns and exchange rate movements. 2ut even in these countries, where presumably the large firms have relatively more foreign trade thando their <.=. counterparts, the percentage of firms with significant return exposures was still less than would be expected. =everal possible explanations have been offered for such small exposures for <.=. firms. "irst, the small observed exposures may be due to the offsetting nature of currency exposures. =ince researchers generally lac! complete data on individual firms$ imports, exports and business competitors, they cannot identify which firms are exposed to a given currency. 2rown$s (B//-* study of the hedging practices of a <.=. firm found that the firm hedged twenty-four different currencies due to both extensive foreign sales and the importation of a ma,or portion of their manufacturing inputs. 6s a result, some studies have chosen to examine exchange rate exposure at the industry level where it is more appropriate to proxy for exchange rate movements with changes of a trade-weighted index. =econd, the small observed exposures may be due to the complexity of the firms$ foreign exchange exposures since exchange rate ris! can vary over time as well as crosssectionally. "or example, it can vary with the level of a firm$s foreign trade, the demand elasticity of the firm$s product, or the competitive reactions of other firms in the same industry. 6llayannis (-881*, 2odnar, 4umas,and #arston (B//B*, 6llayannis and Ihrig (B//-*, and "rancis, ;asan and ;unter (B//.* examined time-varying exposure at the industry level. They provided evidence that exchange rate exposures increase with the level of foreign trade and decrease with firms$ ability to mar! up prices and pass through the impact of exchange rate movements to customers. These studies indicated that it is important to measure exposure in a specification that allows it to vary both crosssectionally and over time.
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Impact of currency fluctuation on profitability of Indian IT sector Third, with the rapid development of hedging instruments since the -80/s, more firms are actively involved in the management of foreign exchange ris!. ;owever, a survey of derivative usage by 2odnar, ;ayt and #arston (-880* indicated that although many firms engaged in currency hedging, they hedged selectively. "urther, 5uay and Iothari (B//D* found that the potential effects of hedging with derivatives were small compared to firm si+e. ;entschel and Iothari (B//-* found no differences in ris! for firms that hedge with derivatives versus those that do not. 5iven these evidences, it is unli!ely that hedging can completely insulate firms from currency ris!. 2odnar and #arston (B///* developed a simple model of exposure that, when calibrated, provided estimates of exposure consistent with the previous findings of low exposure. The model was that of a monopoly firm whose revenues and expenses are exposed to changes in exchange rates. It demonstrated that exposures were related to net foreign currency revenues and profit margins. 2odnar, 4umas, and #arston (B//B* provided an explicit theoretical model, and they found relatively high levels of exposure. 2ut their model was estimated for a group of 7apanese firms that have been chosen because they were li!ely to have high levels of exposure. ?ther theoretical studies of exposure include 6dler and 4umas (-809*, ;e!man (-80.*, =hapiro (-81.*, "lood and Eessard (-80A*, von <ngern-=ternberg and von 3ei+sac!er (-88/*, Eevi (-889* and #arston (B//-*. :one of these studies have attempted to provide empirical estimates of their models. =par!s and 3ei (B//D* argued that exchange rate movements are more li!ely to affect a firm through direct effects on short-term cash flows, which in turn depend on the firm$s sensitivity to short-term cash flow volatility. =imilarly, when a firm has substantial growth opportunities, exchange rate movements can have greater effects on firm value due to the firm$s larger underinvestment costs. If exchange rate changes have pronounced effects on fundamental values primarily when the resulting short-term cash flow fluctuations force the firm into financial distress or cause it to forsa!e positive :PJ investment opportunities, the magnitude of exposures would vary cross-sectional with the expected cost of financial distress in terms of both the probability of distress and the cost R V Institute of Management 17
Impact of currency fluctuation on profitability of Indian IT sector related to it, so that firms that have greater expected costs of financial distress should be more exposedto exchange rate ris!. I&-act of currency f$uctuation on Indian IT sector: It was a recent research conducted by 6!shay #adhava G = and #ihir 4ash in B//8. The research was conducted for two financial years B//1-/0 and B//0-/8. The main ob,ective of that research was to analyse the forex exposure of IT companies, to relate the forex exposure to the profitability of IT companies. The study investigated the impact of the I:> <=4 exchange rate fluctuation on the IT sector as a whole and surveys the different types of strategies adopted by the information technology firms to mitigate the impact of forex ris!. The analysis was performed on a random sample of forty-four ma,or IT companies and used the concept of forex exposure to assess the same. The study was resulted in saying that the forex exposure is alarming only small cap firms and mid cap as well as large cap firms are less affected by the exposure but in reality profitability of big giants are also affected to large extent this deviation in result and reality gave scope for further study. I&-act of currency f$uctuation on IT stocks: This study was conducted by #r. 5opal!rishna during B/-/ as an academic fulfillment pro,ect. The study was ta!en up to !now the impact of 4ollar >upee rate fluctuation on stoc! prices which was resulted from the <= debt crisis. The study was more concentrating on understanding the wor!ing mechanism of currency mar!et but the focus on currency fluctuation and mitigating strategies was limited. This study was aiming at analy+ing the ris! and return of IT company stoc!s, understanding the wor!ing of currency mar!et, finding the effects of currency fluctuation on IT firms and to study the strategies adopted by IT firm to mitigate forex ris!. The study was limited only to the nine Indian IT firms and for the period of five years. =imple statistical tools li!e return and standard deviation was use for the study but it was R V Institute of Management 10
Impact of currency fluctuation on profitability of Indian IT sector not focusing on analy+ing forex ris! on profitability. The study depicted that the
information technology firms are not severely affected by the currency fluctuation due to ris! mitigation strategy adopted by the firms, the study was concluded saying that the firms$ profitability affected in B//0-/8 mainly because of the uncertainty of <= debt crisis apart from that the firms are not severely affected from the fluctuations.
2.+ %tate&ent of the -ro,$e&:

"orex exposure and exchange rate ris! has become an important aspect in present Indian business context' especially for Information technology sector it has become an integrated part since it started outsourcing the software and technology. #any Information Technology companies involved in the export and import are suffering from the exchange rate fluctuation. The level of forex exposure that the IT firms have, to what extent this exposure affects the profitability of the firms and which segment of the IT sector affected mostly are the questions to be answered through this study.
2.4 O,?ecti1es of the study:

To analyse the volatility of exchange rates of I:>. To analyse the level of forex exposure of selected Indian IT companies. To analyse the impact of fluctuation of the exchange rates on the profitability of Indian IT companies. To !now which segment of the IT sector is mostly affected by the forex fluctuation.
2.6 %co-e of the study:

The study is concentrating on the forex exposure of Indian IT sector' the scope of this study is restricted to analy+ing the exchange rate ris! that is being faced by the IT R V Institute of Management 11
Impact of currency fluctuation on profitability of Indian IT sector companies and thereby neutrali+es the other ris!s such as interest rate ris!, settlement ris!, sovereign ris!, credit ris! and other !inds of ris!s. "or the better convenience period of the study is restricted to D financial years.
2.8 O-erationa$ definition of conce-ts:

Forei n e"chan e risk: The ris! that the exchange rate on a foreign currency will move against the position held by an investor such that the value of the investment is reduced. "or example, if an investor residing in the <nited =tates purchases a bond denominated in 7apanese yen, deterioration in the rate at which the yen exchanges for dollars will reduce the investor@s rate of return, since he or she must eventually exchange the yen for dollars. It is also called exchange rate ris!. Forei n e"chan e e"-osure: Exposure in its most generic term is defined as the condition of being unprotected and investigating further is defined as the disclosure of something secret. Therefore the "oreign exchange exposure can be defined as a measure of the potential for firm$s profitability, net cash flow and mar!et value to change because of a change in exchange rates. 6n importance tas! of the financial manager is to measure foreign exchange exposure and to manage it so as to maximi+e the profitability, net cash flow and mar!et value of the firm. Transaction e"-osure: The sensitivity of the home currency value of assets and liabilities which are denominated in foreign currencies to unanticipated changes in exchange rate is !nown as transaction exposures. Transaction exposure measures gains or losses that arise from the settlement of existing financial obligations the term of which are stated in a foreign currency. The ris!, faced by companies involved in international trade, those currency exchange rates will change after the companies have already entered into financial obligations. =uch exposure to fluctuating exchange rates can lead to ma,or losses for firms. R V Institute of Management 22
Impact of currency fluctuation on profitability of Indian IT sector Trans$ation e"-osure: It is the potential for accounting derived changes in owner$s equity to occur because of the need to KtranslateL foreign currency financial statements of foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements. This exposure is also popularly !nown as accounting exposure. Translation exposure, in foreign exchange, is to convert the results of foreign operations from the local currency to the home currency in the areas of paper exchange gains or losses' it is retrospective and short-term in nature. O-eratin e"-osure: ?perating exposure, in foreign exchange, is currency fluctuations combined with price level changes that can alter the amounts and ris!iness of a firm@s future revenues and costs. It is typified by evaluating real exchange gains or losses. It is prospective and longterm in nature. ?perating exposure deals with changes in long-term cash flows that have not been contracted for but would be expected in the normal course of future business. ?ne might view operating exposure as Kanticipated future transactions exposure,L although the concept is broader because the impact of the exposure might be through sales volume or operating cost changes. ROC!: >eturn on capital employed (>?%E* is a measure of the returns that a business is achieving from the capital employed, usually expressed in percentage terms. %apital employed equals a company@s Equity plus :on-current liabilities (or Total 6ssets M %urrent Eiabilities*, in other words all the long-term funds used by the company. >?%E indicates the efficiency and profitability of a company@s capital investments. 7*7TM: 6d,usted Profit after Tax margin, also called as :et operating profit after tax (:?P6T* is a company@s after-tax operating profit for all investors, including shareholders and debt R V Institute of Management 21
Impact of currency fluctuation on profitability of Indian IT sector holders. It is equivalent to earnings before interest after taxes (E2I6T* and equal to :?PE6T 6P6T# is a measure to !now the real profit generated by the company through its core business. It can be calculated using the formula' 6P6T# N :et Profit after Tax O after tax Interest Expense P after tax Interest Income.
2.9 Hy-othesis:
For 7*7TM: H.: There is no significant relationship between currency fluctuation and the ad,usted profit after tax margin of the firm. H1: There is a significant relationship between currency fluctuation and the ad,usted profit after tax margin of the firm. For ROC!: H.: There is no significant relationship between currency fluctuation and the return on capital employed of the firm. H1: There is a significant relationship between currency fluctuation and the return on capital employed of the firm.
2.: Methodo$o y:
Ty-e of research: "or the purpose of this study analytical research is applied. Data co$$ection: 4ata for the study is collected through secondary sources such as company$s annual reports, official websites and published articles. The research period encompassed the B//8--/, B/-/--- and B/----B. R V Institute of Management 22
%a&-$in : %a&-$e unit: "or the purpose of this study :=E listed IT companies registered with :6==%?# is the sampling unit. %a&-$e si)e: "or the purpose of this study a sample of -. Indian Information Technology companies are selected. %a&-$in -rocedure: %luster sampling method is used for the study, the sample is drawn by dividing the :6==%?# registered IT companies into various clusters based on mar!et capitali+ation then from each cluster a sample of . companies are selected through simple random sampling basis.
*$an of ana$ysis:
The data collected through various sources is analy+ed using both statistical tools and advanced financial tools. The forex exposure of the sample companies has been assessed using 'odnar and Marston@s model which is as follows&
(here2 h1 represent the ratio of revenue to total revenue, h2 represent the ratio of forex expenditure to total expenditure and r represent the expected rate of return cost of capital (which is assumed to be -.F in this study*. "or calculation of volatility, the simple statistical tools li!e arithmetic mean and standard deviation are used. 6rithmetic mean is a mathematical representation of the typical value of a series of numbers, computed as the sum of all the numbers in the series divided by the count of all numbers in the series. 6rithmetic mean is commonly referred to as HaverageH or simply as HmeanH and the formula of mean is as follows&
23
Impact of currency fluctuation on profitability of Indian IT sector 3here, is the arithmetic mean, is sum of all observations and n is number of
observations. =tandard deviation (Q* is defined as the square root of the variance. It measures the variability about the mean of a data set& the closer to the mean, the lower the standard deviation. The formula of standard deviation is as follows'
"or the analysis of impact currency fluctuation on profitability Iarl Pearson$s coefficient of correlation model has been used which is as follows'
"inally the testing of hypothesis is done using the test for analysis of variance (6:?J6* which states as follows'
3ith degrees of freedom (n---* for sample - and (nB--* for sample B.
is the variance of sample - which can be calculated as
and is the
variance of sample B which is calculated as
)-i is the observed frequencies of sample - and )Bi is the observed frequencies of sample B and of sample - and B. and are the respective mean values
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2.A =i&itations of the study:

The limitations of this study are as follows' This study is focusing on only one type of ris! vi+. exchange rate ris! by neutrali+ing other ris!s. Those ris!s neutrali+ed also have considerable impact on the profitability The study is limited only to -. Indian IT companies and for D years.
2.1. Cha-ter sche&e:

Cha-ter 1: Introduction This chapter will be focusing on the introduction to the foreign exchange, information technology, and other important concept used in the study. Cha-ter 2: Re1ie> of $iterature and desi n of the study This chapter provides the brief outline about the statement of problem, ob,ectives, scope of the study, methodology used for collection and analysis of data, hypothesis and the limitations of the study. Cha-ter +: -rofi$e of the industry and se$ected co&-any <nder this chapter, detailed explanation to the IT sector and also a brief explanation to the selected IT firms will be given. Cha-ter 4: Resu$ts2 ana$ysis and discussion The analysis of data collected, interpretation of results will be covered under this chapter with suitable charts and diagrams. Cha-ter 6: %u&&ary of findin s2 conc$usion and su estions.
The summary of findings from the analysis and interpretation, conclusion to the study and the suitable suggestions will be provided in this chapter. R V Institute of Management 25
Impact of currency fluctuation on profitability of Indian IT sector 'i,$io ra-hy 7nne"ure
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+.1 *rofi$e of Indian IT Industry:

Information technology (IT* industry in India has played a !ey role in putting India on the global map. IT industry in India has been one of the most significant growth contributors for the Indian economy. The industry has played a significant role in transforming India$s image from a slow moving bureaucratic economy to a land of innovative entrepreneurs and a global player in providing world class technology solutions and business services. The industry has helped India transform from a rural and agriculture-based economy to a !nowledge based economy. Information Technology has made possible information access at gigabit speeds. It has made tremendous impact on the lives of millions of people who are poor, marginali+ed and living in rural and far flung topographies. Internet has made revolutionary changes with possibilities of e-government measures li!e e-health, e-education, e-agriculture, etc. Today, whether its filing Income Tax returns or applying for passports online or railway e-tic!eting, it ,ust need few clic!s of the mouse. India$s IT potential is on a steady march towards global competitiveness, improving defense capabilities and meeting up energy and environmental challenges amongst others. IT-ITE= sector in India, with the main focus on increasing technology adoption, and developing new delivery platforms, has aggregated revenues of <=4 00.- billion in "GB/--, while generating direct employment for over B.0 million people. ?ut of 00.billion, export revenues (including ;ardware* has reached <=4 .8.9 billion in "GB/-while domestic revenues (including ;ardware* of about <=4 B0.0 billion. Today IT and ITE= sectors lead the economic growth in terms of employment, export promotion, revenue generation and standards of living. Market %i)e The Indian IT R ITE= industry has continued to perform its role as the most consistent growth driver for the economy. =ervice, software exports and business process outsourcing (2P?* remain the mainstay of the sector. ?ver the last five years, the IT R R V Institute of Management 27
Impact of currency fluctuation on profitability of Indian IT sector ITE= industry has grown at a remar!able pace. 6 ma,ority of the "ortune .// and 5lobal B/// corporations are sourcing IT ITE= from India and it is the premier destination for the global sourcing of IT R ITE= accounting for .. per cent of the global mar!et in offshore IT services and garnering D. per cent of the ITE= 2P? mar!et. India@s IT and 2P? sector exports are expected to grow by -B--9 per cent in "G-9 to touch <=C 09 billion - <=C 01 billion, according to :asscom. Internet industry of India is expected to contribute <=C -// billion to the country@s gross domestic product (54P* and generate about BB million ,obs by B/-., as per a report titled @?nline and <pcoming& The internet@s Impact on India@, released by #cIinsey and %o. IT spending in India is pro,ected to reach <=C 1-.. billion in B/-D, an increase of 1.1 per cent as compared to <=C AA.9 billion pro,ected for B/-B, as per a report by 5artner. The mar!et si+e of the industry is expected to rise to <=4 BB. billion by B/B/ considering India@s competitive position, growing demand for exports, 5overnment policy support, and increasing global footprint. IT ITe= industry has led India@s economic growth and this sector@s contribution to the national 54P has risen from -.B per cent in -881-80 to an estimated 1.. per cent in B/----B. IT ITE= industries are highly locali+ed and clustered in seven cities as of today. These are& 2angalore, ;yderabad, %hennai, 5urgaon :oida :ew 4elhi, Iol!ata, #umbai and Pune. Infrastructure limits and scarcity of land has recently led to expansion to newer places li!e 6hmedabad, 2hubaneshwar, %handigarh, %oimbatore, 7aipur, Iochi, #adurai, #angalore, #ysore and Trivandrum. Do&estic Markets The mar!et for enterprise networ!ing equipment in India is estimated to grow from <=C - billion in B//0 to <=C -.1 billion by B/-B, recording a compounded annual growth rate (%65>* of -. per cent during this period, according to a study by =pringboard >esearch titled SEpicenter of 5rowthPIndian Enterprise :etwor!ing Equipment #ar!et >eport@ released in 4ecember B//8.
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Outsourcin : India is a preferred destination for companies loo!ing to offshore their IT and bac!-office functions. It also retains its low-cost advantage and is a financially attractive location when viewed in combination with the business environment it offers and the availability of s!illed people. %o&e ,i dea$s in the outsourcin s-ace inc$ude: 3ipro Etd, an IT services company, has entered into a strategic collaboration with ;itachi 4ata =ystems, to offer co-branded products and services on ;itachi Technology in India. =oftware company, Tata %onsultancy =ervices (T%=* has won a multi-year outsourcing contract from :orway-based telecom company, Telenor :orway to provide application maintenance and development services. ;%E Technologies has entered into a five-year IT infrastructure outsourcing deal with =ingapore Exchange (=5)* for <=C --/ million. The company has also won a <=C .// million strategic IT outsourcing contract from <=-based drug manufacturer, #erc! =harp and 4ohme (#=4*. %omputer services firm, #ahindra =atyam has signed a four-year offshore contract with 4enmar!-based IT company, I#4 for <=C 90 million. =oftware exporter Patni %omputer =ystems won a five-year IT and bac!-office contract potentially worth around <=C B// million from <=-based health insurance provider <niversal 6merican. In1est&ents: Indian IT@s core competencies and strengths have placed it on the international canvas, attracting investments from ma,or countries. 2etween 6pril B/// and 4ecember B/-B, R V Institute of Management 21
Impact of currency fluctuation on profitability of Indian IT sector the computer software and hardware sector attracted cumulative foreign direct investment ("4I* of >s .B,D11./0 crore (<=C 8.AD billion*, according to the 4epartment of Industrial Policy and Promotion (4IPP*.
2etween 6pril B/// and #arch B/-/, the computer software and hardware sector received cumulative foreign direct investment ("4I* of <=C 8,01B.98 million, according to the 4epartment of Industrial Policy and Promotion.
The total investments of E#% %orporation, a leading global player of information infrastructure solutions in India, will touch <=C B billion (over <=C B./- billion* by B/-9.
=yntel, an IT company, plans to invest around <=C ./ million in its global development centre in %hennai.
>ussian IT security software provider, Iaspers!y Eab, will be investing <=C B million in its India operations at ;yderabad during the next financial year.
Road 7head The Indian information technology sector continues to be one of the sunshine sectors of the Indian economy showing rapid growth and promise. 6ccording to a report prepared by #cIinsey for :6==%?# called @Perspective B/B/& Transform 2usiness, Transform India@ released in #ay B//8, the exports component of the Indian industry is expected to reach <=C -1. billion in revenue by B/B/. The domestic component will contribute <=C ./ billion in revenue by B/B/. Together, the export and domestic mar!ets are li!ely to bring in <=C BB. billion in revenue, as new opportunities emerge in areas such as public sector and healthcare and as geographies including 2ra+il, >ussia, %hina and 7apan opt for greater outsourcing.
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+.2 %tructure of the IT sector:

=tructure of the IT sector mainly consists of the following component. IT services IT enabled services =oftware products ;ardware
IT ser1ices IT services constitute a ma,or part of the IT industry of India. IT services include client, server and web based services. ?pportunities in the IT services sector exist in the areas of consulting services, management services, internet services and application maintenance. The ma,or users of IT services are 5overnment, 2an!ing, "inancial services, >etail and distribution, #anufacturing. IT ena,$ed ser1ices The services which ma!e extensive use of information and telecommunication technologies are categori+ed as IT enabled services. The IT enabled services is the most important contributor to the growth of the IT industry of India. =ome of the important services covered by the ITE= sector in India are %ustomer-interaction services including call-centers, 2ac!-office services, >evenue accounting, 4ata entry and data conversion, ;> services, Transcription and translation services, %ontent development and animation, >emote education, 4ata search, 5I=, #ar!et research, :etwor! consultancy %oft>are -roducts
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Impact of currency fluctuation on profitability of Indian IT sector =oftware products are among the most highly exported products from India. The software industry in India originated in the -81/s and grew at a significant pace in the last ten years. 2etween -88A--881 and B//B-B//D, the Indian software industry grew more than five times from BAD/ crores to -DB// crores. 4uring the same period software and service exports from India grew by almost twelve times. Hard>are The hardware sector of the It industry focuses on the manufacturing and assembling of computer hardware. The consumption of computer hardware is high in the domestic mar!et. 4ue to the rise in the number of IT companies, sales of des!tops, laptops, servers, routers, etc have been on the rise in recent years. #any domestic and multi-national' companies have invested in the computer hardware mar!et in India. 6nother categori+ation in the structure of India@s IT industry is related to the mar!et. There are two ma,or mar!et classifications - the domestic mar!et and the export mar!et. The export mar!et, dominates the IT industry accounting for 1.F of the revenue.
+.+ Market %tructure:

To- soft>are co&-anies in India There are plenty of software companies in India which have been doing well. ;owever, some of the top Indian software companies can be listed as&
Today the software industry has become the bac!bone of companies around the world. 3ith technology advancing in leaps and bounds, there is no stopping IT professionals from around the world to bridge the gap between huge untapped mar!ets and its customers, as well as creating an opportunity for innovation.
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The companies that dominate the software industry are those which loo! out for these opportunities and provide instant solutions. The Indian software industry has arrived, and the companies that are dominating this industry, based on their turnovers, are&
+.4 *ROFI=! OF TH! %!=!CT!D COM*7NI!%:

+.4.1 =7R#! C7* COM*7NI!%: 1. T7T7 CON%U=T7NCB %!RCIC!%: Tata %onsultancy =ervices started in -8A0, T%= a member of the Tata 5roup has grown to its current position as the largest IT services firm in 6sia based on its record of outstanding service, collaborative partnerships, innovation, and corporate responsibility. It is largest IT employer in India, having total manpower strength of -,B-,A-/ employees. It provides services to wide range of segment li!e ban!ing R financial services, energy, resources R utilities, government, telecom, media R information services, etc. Tata %onsultancy =ervices delivers real results to global businesses, ensuring a level of certainty no other firm can match. T%= offers a consulting-led, integrated portfolio of IT and IT-enabled services delivered through its unique 5lobal :etwor! 4elivery #odel, recogni+ed as the benchmar! of excellence in software development. T%= has over -9D,/// of the world@s best trained IT consultants in 9B countries. >evenue of CA./ billion (fiscal year ending D- #arch, B//8*. 2. INFO%B%: Infosys Eimited was started in -80- by seven people with <=C B./. Today, they are a global leader in consulting, technology and outsourcing with revenues of <=C 1.BDbillion (ET# TD "G-D*. #any of the world$s most successful organi+ations rely on R V Institute of Management 33
Impact of currency fluctuation on profitability of Indian IT sector Infosys to deliver measurable business value. Infosys provides business consulting, technology, engineering and outsourcing services to help clients in over D/ countries build tomorrow$s enterprise. Infosys has a global footprint with A1 offices and A8 development centers in <=, India, %hina, 6ustralia, 7apan, #iddle East, <I, 5ermany, "rance, =wit+erland, :etherlands, Poland, %anada and many other countries. Infosys and its subsidiaries have -..,AB8 employees as on 4ec D-, B/-B. +. (I*RO: 3ipro Etd is a global information technology, consulting and outsourcing company with -9/,/// employees serving over 8// clients in .1 countries. The company posted revenues of C1.D1 billion for the financial year ended #ar D-, B/-B. 3ipro is globally recogni+ed for its innovative approach towards delivering business value and its commitment to sustainability. They helps the customers to do business better leveraging their industry-wide experience, deep technology expertise, comprehensive portfolio of services and a vertically aligned business model. Their ..O dedicated emerging technologies S%enters of Excellence$ enable them to harness the latest technology for delivering business capability to their clients. 4. HC=: ;%E is a leading global Technology and IT Enterprise with annual revenues of <=C 9.8 billion. The ;%E Enterprise comprises two companies listed in India, ;%E Technologies and ;%E Infosystems. The D decade old enterprise, founded in -81A, is one of India@s original IT garage startups. Its range of offerings span >R4 and Technology =ervices, Enterprise and 6pplications %onsulting, >emote Infrastructure #anagement, 2P? services, IT ;ardware, =ystems Integration and 4istribution of Technology and Telecom products in India. The ;%E team comprises ..,/// professionals of diverse nationalities, operating across -0 countries including DA/ points of presence in India. R V Institute of Management 34
Impact of currency fluctuation on profitability of Indian IT sector 6. T!CH M7HINDR7: Tech #ahindra is part of the <= C-..8 billion #ahindra 5roup and is a leading global systems integrator and business transformation consulting organi+ation, focused primarily on the telecommunications industry. Tech #ahindra expanded its IT portfolio in B//8 by acquiring the leading global business and information technology services company, Mahindra %atya& (earlier !nown as =atyam %omputer =ervices*. Tech #ahindra$s capabilities spread across a broad spectrum, including 2usiness =upport =ystems (2==*, ?perations =upport =ystems (?==*, :etwor! 4esign R Engineering, :ext 5eneration :etwor!s, #obility =olutions, =ecurity consulting and Testing. The solutions portfolio includes %onsulting, 6pplication 4evelopment R #anagement, :etwor! =ervices, =olution Integration, Product Engineering, Infrastructure #anaged =ervices, >emote Infrastructure #anagement and 2=5 (comprises 2P?, =ervices and %onsulting*. 3ith an array of service offerings for T=Ps, TE#s and I=Js, Tech #ahindra is a chosen transformation partner for several leading wireline, wireless and broadband operators in Europe, 6sia-Pacific and :orth 6merica.
+.4.2 MID C7* COM*7NI!%: 1. MINDTR!! #indTree %onsulting is an international IT-consulting company that delivers affordable business and technology solutions through global software development. The company was started in -888 by -/ industry professionals who came from %ambridge Technology Partners, Eucent Technologies and 3ipro. The founding team was led by 6sho! =oota who was at that time vice chairman and president of 3ipro, one of India@s largest software. %ompany headquartered in =omerset, :.7., and 2angalore, India, the company@s seasoned management team and employees s!illed in technology, business analysis and pro,ect management approach technology R V Institute of Management 35
Impact of currency fluctuation on profitability of Indian IT sector initiatives in a business context. #indTree %onsulting develops applications to help companies enhance their enterprise operations. #indTree@s employee strength exceeds A// and the company expects to grow to 8// people by the end of the year. #indTree was selected as one of %omputerworld maga+ine@s 2est Places to 3or! in IT for B//B. 2. M*H7%I%: #phasis Eimited delivers applications services, infrastructure services, and business process outsourcing (2P?* services globally. It speciali+es in providing a suite of application development and maintenance services, infrastructure outsourcing (IT?* services and 2P? to clients worldwide. The %ompany services clients in ban!ing and capital mar!ets, insurance, manufacturing, communications, media and entertainment, healthcare and life sciences, transportation R logistics, retail and consumer pac!aged goods, energy and utilities, and to 5overnments worldwide. +. FIN7NCI7= T!CHNO=O#I!% /India3 =td.: "inancial Technologies (India* Etd. ("TIE*, headquartered in India and listed on the 2ombay =toc! Exchange, is India@s leading Jertical =pecialist enterprise delivering mission-critical, =traight Through Processing (=TP* solutions comprising 4omain Expertise, Technology Eicensing and 4evelopment R Transaction ?utsourcing services. "TIE has a state-of-the-art Technology 4evelopment %enter in #umbai providing transaction automation technologies for Equities, 4erivatives, "orex and %ommodity mar!ets. "TIE also offers mar!et infrastructure based @shared services@ involving sophisticated Exchange operations and technology infrastructure as a neutral service provider. "TIE is focused on developing mission-critical technology solutions for the "inancial =ervices Industry and the facilitation of change within the "inancial #ar!etplace. 4. INFOT!CH =td.:
36
Impact of currency fluctuation on profitability of Indian IT sector It was founded in -88- and it is a 9/// people software services company with core competencies in geographic information systems (5I=*, engineering design and IT services. They have speciali+ed in software services and solutions in these areas for the utilities, telecommunications, manufacturing, transportation, government and retail mar!ets. Infotech operate from BB global locations, including . development centers and accommodate the largest operations out of India for 5I= software and data management services and aerospace engineering design services. 6. H!D7(7R!: Persistent is a global company speciali+ing in software product and technology innovation. "or more than two decades, they have partnered closely with pioneering start-ups, innovative enterprises and the world$s largest technology brands. They also have utili+ed their fine-tuned product engineering processes to develop best-in-class solutions for customers in technology, telecommunication, life science, healthcare, ban!ing, and consumer products sectors across :orth 6merica, Europe, and 6sia. Persistent$s global team is made up of the industry$s best and brightest software engineers and technology consultants whose expertise spans from niche technologies, to the latest technologies and built-to-scale enterprise applications.
+.4.+ %M7== C7* COM*7NI!%: 1. THINE%OFT: Thin!soft 5lobal =ervices Eimited is a software service provider primarily delivering software validation and verification services to the ban!ing and financial services industry worldwide. The %ompany$s services include financial software testing services, requirements audit, software testing support development teams, and financial software testing - user support and training. It provides functional support to development teams and review of unit test plans. >equirements audit services include R V Institute of Management 37
Impact of currency fluctuation on profitability of Indian IT sector business process review, mapping and documentation, business requirements documentation, product evaluation criteria, product feature chec!list and gap analysis between business requirements and functional specifications.
2. HINDUF7 #=O'7=: ;indu,a 5lobal =olutions (;5=* is a world leader in %ustomer >elationship and 2usiness Process #anagement 3ith a global footprint and an experience of over three decades. ;5= was established in India under the name 6EIT (6sho! Eeyland Information Technology*, providing information technology services in -88D with ,ust one client and B. employees. 6EIT was merged with ;indu,a "inance %orporation (;"%* in B/// to form ;5=. ;indu,a 5lobal =olutions Etd is one of the largest transnational business conglomerates in the world. The company provides information technology enabled services in India and internationally. They offer professional IT staffing, claims processing, call center, software development, and consulting services. +. INFINIT! COM*UT!R%: Infinite %omputer =olutions India Etd is a global service provider of Infrastructure #anagement =ervices, Intellectual Property (IP* Eeveraged =olutions and IT =ervices, focused on the Telecom, #edia, Technology, #anufacturing, Power and ;ealthcare industries. Infinite %omputer =olutions India Etd was incorporated on =eptember A, -888 with the name Infinite %omputer =olutions India Pvt Etd but the company started its operations in the year B///. They have four delivery centers in India at 2angalore, ;yderabad, 5urgaon and %hennai. 6lso, they have -9 offices across the globe, including offices in multiple locations in the <=, <I, India, %hina, #alaysia, =ingapore and 6ustralia. 4. R7MCO %B%T!M%: R V Institute of Management 30
Impact of currency fluctuation on profitability of Indian IT sector >amco =ystems, a part of the <=4 - 2illion >amco 5roup, is a leading software company focused on consulting, products, and managed services business. =tarted as an > R 4 division of >amco Industries Eimited in -88B, >amco =ystems was later established as an independent company in -888. ;eadquartered in %hennai, the company has -1 offices spread across India, 6P6%, <=, %anada, Europe, #iddle East and 6frica. The company focuses on providing innovative business solutions that can be delivered quic!ly and cost-effectively in complex environments. >amco has over -./,/// users from -///O customer organi+ations, globally since its inception. The company provides solutions to multiple verticals including ban!ing, insurance, manufacturing, supply chain, aviation, transportation and logistics, healthcare, governance, retail and more. The company$s revenue is around <=4 98.AD m and currently employs over -,0// employees. 6. *O=7RI%: Polaris "T is a leading "inancial Technology company headquartered in %hennai. 3ith its comprehensive portfolio of products, smart legacy moderni+ation services and consulting, Polaris offers state-of-the-art solutions for %ore 2an!ing, %orporate 2an!ing, 3ealth R 6sset #anagement and Insurance. Polaris is the chosen partner for 8 of the top -/ global ban!s and 1 of the -/ top global insurance companies. Polaris believes that value creation in an outsourcing relationship grows as customer relationships mature with time. >elationship, expertise, technology, Intellectual Property and 5lobal >each are the routes that enable the company to come closer to its customers worldwide.
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Impact of currency fluctuation on profitability of Indian IT sector Ta,$e 4.1: Ta,$e sho>in the su&&ary of fore" e"-osure and -rofita,i$ity &easures of sa&-$e IT co&-anies:
COMPA NY TCS ge Lar INFY ge Lar WIPRO ge Lar HCL TECH MAH MPHASI S MIND M! 2346 ge Lar 2352 ge M! 2344 1 2734 16302 2342 7 3532 26314 2321 1 1034 7311 2343 2322 4 1131 16343 2344 0 2333 22332 2327 1 2335 11334 2342 6 2234 22310 2315 2361 5 2332 22317 2342 4 2132 1631 13315 2340 5 1136 17312 17322 2310 4 1632 0375 CAP . Lar 2337 6 3732 2327 2350 0 2233 17316 2331 1 3336 21310 EXP O. 2010 RO APAT CE 4234 M 24313 EXP O. 2336 0 3735 2325 2351 7 2134 14331 2011 RO APAT CE 4433 M 25344 EXP O. 2330 1 4230 2326 2012 RO APAT CE 5533 M 26315
TREE 1 7 measures. Table showing the descriptive statistics of forex 1 exposure and profitability HEXAW 2731 3533 M ! 2322 0341 22333 2322 32326 2310 2130 ARE 2 0 FIN 1035 M ! 2324 1325 46322 2322 0307 21361 2331 62317 TECH 5 INFO 2135 M ! 2326 2532 1731 2327 1634 1135 2333 1233 TECH 0 POLARI S" 2632 2354 22 11325 2344 12371 2361 21 12340 S a## 1
The above table consists of the foreign exchange exposure, >eturn on capital employed and the ad,usted profit after tax margin for the period of study based on the capitali+ation. "orex exposure shown above is calculated using the following formula'
42
Impact of currency fluctuation on profitability of Indian IT sector 3here the h1 represent the ratio of revenue to total revenue, h2 represent the ratio of forex expenditure to total expenditure and r represent the expected rate of return cost of capital. The forex exposure can be understood as the sensitivity of a firm$s profit to the changes in the exchange rate, in proportional terms. The extreme values are "EN 2 which arises
when h-N- and hBN/ (i.e. for a pure exporter*, and "E N - ( h-N/ and hBN- (i.e. for a pure importer*.
which arises when
The >eturn ?n %apital Employed (>?%E* in the above table is the proportionate return generated by the pro,ect company to total investment made by the company. It can be calculated using the following formula'
3here the E2IT is the Earnings 2efore Interest and Tax which can be get by subtracting the cost of goods sold from the total receipts and the capital employed include the total amount invested in the company consisting of both owners fund and borrowed fund. >?%E should always be higher than the rate at which the company borrows' otherwise any increase in borrowing will reduce shareholders@ earnings. The third component of the table, 6d,usted Profit 6fter Tax #argin (6P6T#* is the net profit margin of the company after providing necessary ad,ustments to the non-operating income and expenses. The non-operating income should be deducted from the net profit and li!ewise the non-operating expenses should be added to the same to arrive at the 6P6T#.
The level of forex exposure, >?%E and 6P6T# of the individual sampled firms for the study period are as follows with table and %hart. R V Institute of Management 41
Ta,$e 4.2: Table showing the forex exposure, >?%E and 6P6T# of T%=. Particulars E)P?=<>E >?%E 6P6T# B/-/ /.D1 /.9B /.B9 B/-/.DA /.99 /.B. B/-B /.D0 /... /.BA
Chart 4.1: %hart showing the forex exposure, >?%E and 6P6T# of T%=.
42
7na$ysis: The forex exposure of the company remains almost constant during the period of the study where there is -F and BF change from "GB//8--/ to "GB/-/--- and then to "G B/----B respectively. The return on capital employed had been gradually increasing from /.9B to /.99 and then to /... in the same period. 6d,usted profit after tax margin saw a negligible growth from /.B9 to /.B. and then to /.BA during the period of study.
Inter-retation: "rom the above table and %hart it can be observed that the profitability of the company has not been affected much by the forex exposure and also the company is able to maintain the stability of exposure and thereby increase the return on capital employed. ?ne of the main reasons for stability in the forex exposure is the diversity of mar!ets. The company could able to extent its geo%hartical presence to the non-traditional export hubs which help them to stabili+e their exposure. The company could able to increase its revenue and profits from the ma,or export hubs li!e <=6 and Europe along with sharp increase in 6sia pacific and rest of the world.
The diversity of mar!et and the stability of the exposure have led company to increase its returns to the considerable extent. The ad,usted profit of the company remain stabili+ed during the period of study even though the profit is increasing mainly because of the increase in the non-operating income.
43
Ta,$e 4.+: Table showing the forex exposure, >?%E and 6P6T# of Infosys. Particulars E)P?=<>E >?%E 6P6T# B/-/ /.A/.D1 /.B1 B/-/..0 /.D0 /.B. B/-B /..8 /.9/.BA
Chart 4.2: %hart showing the forex exposure, >?%E and 6P6T# of Infosys
44
7na$ysis: "rom the above table and %hart it can be observed that the company was able to minimi+e its forex exposure from /.A- to /..0 during the period "G B//8--/ P "G B/-/-- but it had again increased to /..8 in the "G B/----B. >?%E of the company had been gradually increasing from /.D1 to /.D0 and then to /.9- which but the ad,usted profit of the firm was reduced from /.B1 to /.B. and then able to recover to /.BA. Inference: >?%E of the company was not much influenced by the forex exposure but the ad,usted profit of the company was moving in tune with the exposure. The company is considered to be the most exposed firm among the IT ma,ors and its exposure was high mainly because of the concentration of operations and imbalance in the forex receipts and payments. :early 1/F of the income revenue for the company comes from two geo%hartical sources such as <=6 and Europe. This mar!et concentration has led the firm to have more forex exposure. The company could able to increase its returns mainly because of the devaluation of the rupee. 4uring the study period, the Indian rupee has depreciated to a considerable extent due to the no demand for Indian products mainly from the European <nion. 2ecause of this devaluation the revenue of the company in rupee term has gone up to the considerable extent which resulted in increasing return, but the ad,usted profit of the company remain constant around /.B. mar! mainly because of increasing non-operating income.
45
Ta,$e 4.4: Table showing the forex exposure, >?%E and 6P6T# of 3ipro. Particulars E)P?=<>E >?%E 6P6T# B/-/ /.9B /.BD /.BB/-/.9B /.BB /.-0 B/-B /.D8 /.B/.-9
Chart 4.+: %hart showing the forex exposure, >?%E and 6P6T# of 3ipro.
46
7na$ysis: "orex exposure of the firm was stagnated at /.9B in the "G B//8--/ and "G B/-/--- and it had reduced to /.D8 in the "G B/----B. >?%E of the firm was reduced gradually by /./- during the period of the study whereas the ad,usted profit of the firm was also reduced to greater extent. Inference: "rom the above analysis it can be inferred that the >?%E and the ad,usted profit of the firm was reduced to a considerable extent even though the forex exposure of the firm is reduced. The company$s exposure remains moderate during the period of study mainly because of the ris! mitigation strategies adopted by the company. The use of financial derivatives of the company has increased to the greater extent during the period of study which led the company to ensure that the exposure remain within reach. The 6P6T# of the company was decreasing during the period of study even though the company posted the increasing profit after tax mainly because of the reason that the reduction in the non-operating expenses as well as increased income in the way of interest and dividend. The >?%E reduced slightly because of the increase in operating expenses.
47
Ta,$e 4.6: Table showing the forex exposure, >?%E and 6P6T# of ;%E Particulars E)P?=<>E >?%E 6P6T# B/-/ /.BB /.B/ /.B/ B/-/.-. /.B/.-1 B/-B /.-0 /.D9 /.B-
Chart 4.4: %hart showing the forex exposure, >?%E and 6P6T# of ;%E
40
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the firm is reduced from /.BB in the "G B//8--/ to /.-. in "G B/-/--- but later it has gone up to /.-0 in the "G B/----B. The >?%E of the company stood at /.B in "G B//8--/ which was later gone up to /.B- in "G B/-/--- and to /.D9 in "G B/----B but the ad,usted profit of the company showing some volatility by reducing from /.B in B//8--/ to /.-1 in "G B/-- later by increasing to /.B-. Inference: "rom the above analysis it is clear that the company was able to minimi+e the forex exposure to certain extent. 6d,usted profit of the company reacted to some extent by varying to certain proportion but the >?%E of the company was gradually increasing without much influenced by the changes in exposure value. The main reason for the variation in the exposure is the revenue generated by the firm in forex. The company$s foreign income in the financial year B/-- had grown only by ..DF whereas the total revenue of the company had grown at D-.-F which clearly shows that the forex revenue of the company had reduced even though the expenses in forex is almost same. The company$s >?%E had been continuously increasing mainly because of the reduction in the growth rate of operating expenses. The company$s expenses had grown in single digit which led the company to post increase in the >?%E. The 6P6T# of the company remain varying mainly because of the variation in exchange rate. The company did not had the considerable fluctuation in the income (around D/F margin* during the year but when it translated into Indian rupee it had amounted only to the growth of B1..F which can be inferred as because of the forex fluctuation. "G
41
Ta,$e 4.8: Table showing the forex exposure, >?%E and 6P6T# of TE%; #6;I:4>6 Particulars E)P?=<>E >?%E 6P6T# B/-/ /..B /.B/ /.-A B/-/.99 /.-A /.-9 B/-B /.90 /.-A /./8
Chart 4.6: %hart showing the forex exposure, >?%E and 6P6T# of TE%; #6;I:4>6
52
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the company remains at /..B in "G B//8--/ which was reduced to /.99 in "G B/-/--- but later it has gone up to /.90 in "G B/----B. The >?%E and the ad,usted profit of the company was at /.B and /.-A in "G B//8--/ which was later gone down to /.-A and /.-9 respectively in "G B/-/--- and final stood at /.-A and /./8 in "G B/----B. Inference: "rom the above analysis it can be inferred that the forex exposure of the company was high at around /.. which was resulted in low >?%E and ad,usted profit. 6s compared to >?%E, ad,usted profit reacted to greater extent to the changes in exposure value where the >?%E remain constant after decreasing to some extent. The exposure of the company remains volatile during the period of study mainly because of the fluctuation of exchange rate of Indian rupee. The company had posted the revenue of 0-F from <= and Europe where the volatility of Indian rupee against <=4 and E<>? was very high during that period which resulted in high exposure and low moderate returns and profits.
51
Ta,$e 4.9: Table showing the forex exposure, >?%E and 6P6T# of #P;6=I=& Particulars E)P?=<>E >?%E 6P6T# B/-/ /.99 /.D. /.BA B/-/.B8 /.BD /.BB B/-B /.B1 /.B/ /.-1
Chart 4.8: %hart showing the forex exposure, >?%E and 6P6T# of
52
7na$ysis: "rom the above table and %hart it can be observed that forex exposure of the company has gradually decreased from /.99 in "G B//8--/ to /.B8 and then to /.B1 in the financial years B/-/--- and B/----B respectively. 2oth >?%E and ad,usted profit of the company has reacted in the same way by reducing from /.D. and /.BA in "G B/-/ to /.BD and /.BB in "G B/-/--- and then to /.B and /.-1 in "G B/----B respectively. Inference: 2y loo!ing at the above analysis it can be inferred saying that the all three components of the company has positive correlation and the company can increase its profits and returns by ta!ing more ris! and exposing more to foreign exchange. The exposure of the company had come down because of the reason that the amount of forex expenses was high during the period of study. The growth rate of forex expenses was greater than that of forex income during the period of study which led the company to minimi+e its exposure. The >?%E and 6P6T# was also reducing during the period mainly because of the reason that expenses in foreign currency has increased to considerable extent in rupee value because of the rupee devaluation.
53
Ta,$e 4.:: Table showing the forex exposure, >?%E and 6P6T# of #I:4T>EE Particulars E)P?=<>E >?%E 6P6T# B/-/ /.9A /.B1 /.-1 B/-/.9B /.-0 /./0 B/-B /.9D /.B9 /.--
Chart 4.9: %hart showing the forex exposure, >?%E and 6P6T# of #I:4T>EE
54
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the company was at /.9A in "G B//8--/ later it was reduced to /.9B in "G B/-/--- and again goes up to /.9D in "G B/----B. >?%E and ad,usted profit of the company was also behaved in the same direction where the >?%E was at /.B1 in "G B//8--/ and goes down to /.-0 and then recovered to /.B9 in "G B/----B whereas the ad,usted profit was at /.-1 in "G B//8--/ and goes down to /./0 in "G B/-/--- and recovered to /.-- in "G B/----B. Inference: "rom the above analysis it can be inferred that the company$s >?%E and ad,usted profit was reacted in the positive direction to the changes in exposure. The changes in returns and profit were very high as compare to the changes in exposure. "orex exposure of the company had reduced in the financial year B/-- mainly because of reduction in the income from the European <nion. The revenue from this region had decreased by /.9F which later had turned into green color in "G-B/-B. The >?%E and 6P6T# were also volatile during the period of study mainly because of increase in the operating expenses and the non-operating income.
55
Ta,$e 4.A: Table showing the forex exposure, >?%E and 6P6T# of ;E)636>E Particulars !D*O%UR! ROC! 7*7TM B/-/ /.BB /./0 /.B/ B/-/.BB /.B1 /.DB B/-B /.-0 /.D. /.D/
Chart 4.:: %hart showing the forex exposure, >?%E and 6P6T# of ;E)636>E
56
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the company remained at /.BB in "G B//8--/ and B/-/--- but later it had been reduced to /.-0 in the "G B/----B. The >?%E of the firm had increased gradually from /./0 in "G B//8--/ to /.B1 in "G B/-/--- and then to /.D. in "G B/----B where the ad,usted profit of the company also saw the rise from /.B to ./DB during "G B//8--/ and B/-/--- but later it had saw a narrow dip of /./B in "G B/----B. Inference: "rom the above analysis it can be observed that the >?%E and ad,usted profit of the company has shown considerable growth when the exposure of the firm been stabili+ed and then reduced. The company can improve its profitability and returns by reducing or stabili+ing its exposure. The reduction in the exposure in the "G B/-B is mainly due to high growth in income through I:> (D9F* against that of in <=4 denomination (-0F*. The company$s E2IT in the same year has grown by .1F which led the company to post /.D. >?%E which was followed by the /.-8 rise in the previous year. The company had outperformed in terms of revenue in spite of challenging business environment which led the firm to post increase in ad,usted profit from /.B to /.DB.
57
Ta,$e 4.1.: Table showing the forex exposure, >?%E and 6P6T# of "inancial Technologies Particulars !D*O%UR! ROC! 7*7TM B/-/ /./9 /./8 /.9A B/-/.BB /./8 /.BB B/-B /.D/.-8 /.A/
Chart 4.A: %hart showing the forex exposure, >?%E and 6P6T# of "inancial Technologies
50
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the company had increased gradually from /./9 to /.BB and then to /.D- during the three financial years of the study. >?%E remained at /./8 in first two years of the study but later rose to /.-8 in the "G B/----B. 6d,usted profit of the company remained very volatile during the study period where it was at /.9A in "G B//8--/ later it had dipped to /.BB in "G B/-/--- and then again recovered to /.A in "G B/----B. Inference: "rom the above analysis it can be inferred that the forex exposure and the >?%E of the company was increased gradually but the profitability remain very volatile. There was some correlation in the movement of >?%E and exposure but the profitability of the company behaved totally in independent way. The company could able to report the high margin of profit at /.9A in the year B/-/ mainly because of the savings in effective tax rates. The effective tax rates for the company had been reduced to the extent of --F in that year which led the company to post high profit. The company could able to repeat the same in the year B/-B due to -AF savings in tax and also because of the rise in revenue which also led to post increase in returns on capital employed.
51
Ta,$e 4.11: Table showing the forex exposure, >?%E and 6P6T# of I:"?TE%;& Particulars !D*O%UR! ROC! 7*7TM B/-/ /.BA
2325 2317
B/-/.B1
2316 2312
B/-B /.DD
2322 2312
Chart 4.1.: %hart showing the forex exposure, >?%E and 6P6T# of I:"? TE%;
62
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the company was increased from /.BA to /.DD during "G B//8--/ to "G B/----B. >?%E of the company saw a slid dip from /.B. to /.-A during "G B//8--/ to "G B/-/--- but later recovered and increased to /.BB whereas the ad,usted profitability decreased from /.-1 to /.-/ during the same period. Inference: "rom the above analysis it is clear that the >?%E of the company behaved in the positive way by moving in the same direction but the ad,usted profit reacted in the opposite way. The >?%E can be improved by !eeping high exposure but the profitability can be increased by reducing the exposure. The main reason for the increase in forex exposure is increase in the foreign operations of the company which resulted in increase in inflow of foreign currency by !eeping the forex expenses stable. The >?%E was reduced during the period of study because of increase in the operating expenses. 2ut the company could able to reverse the down turn trend in "G--B because of increase in revenue to the considerable extent. The company could able to convert this higher revenue into higher profit during the period of study but the ad,usted profit has constantly came down because of the increase in non-operating income.
61
Ta,$e 4.12: Table showing the forex exposure, >?%E and 6P6T# of P?E6>I=& Particulars !D*O%UR! ROC! 7*7TM B/-/ /..9 /.BB /.-B/-/.99 /.BA /.-D B/-B /.A/.B/.-/
Chart 4.11: %hart showing the forex exposure, >?%E and 6P6T# of P?E6>I=
62
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the company was at /..9 in "G B//8--/ which was later reduced to /.99 in "G B/-/--- and then again rose to /.A- in "G B/----B. >?%E and ad,usted profit of the company was at /.BB and /.-- respectively and later increased to /.BA and /.-D in "G B/-/--- and decreased to /.B- and /.- in "G B/----B. Inference: "rom the above analysis it can be inferred that both >?%E and Profitability of the company reacted in quit opposite way to the movements of the forex exposure. ;igher the exposure lowers the profitability and returns. The company is registered as an export oriented unit. In the year B/-- 4-B the revenue derived out of =oftware Exports stood at >s.-.D, D9B.D8 Ea!hs which is 01./BF of the total revenue from operations generated by the %ompany which led the company to have high level of exposure which is very high in the small cap firms. The revenue of the company during the study period was increasing at the rate greater than that of industry but still the company couldn$t able to post attractive profit margin and returns mainly because of the increase in both operating and non-operating expenses. The growth of expenses of the company was considerably greater than that of revenue which had resulted in lower ad,usted profit margin.
63
Ta,$e 4.1+: Table showing the forex exposure, >?%E and 6P6T# of ;I:4<76 5E?26E=& Particulars !D*O%UR! ROC! 7*7TM B/-/ /.D1 /.-. /.-1 B/-/.D8 /.-D /.-9 B/-B /.9/ /.-/ /.-B
Chart 4.12: %hart showing the forex exposure, >?%E and 6P6T# of ;I:4<76 5E?26E=
64
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the company was at /.D1 in "G B//8--/ which was gradually increased to /.D8 and /.9 in the succeeding financial years. The >?%E and ad,usted profit of the company was at /.-1 and /.-8 in "G B//8--/ which was reduced to /.-B R /.-9 in "G B/-/--- and then to /./8 R /.- in "G B/----B. InferenceG "rom the above analysis it can be inferred that the >?%E and the profitability of the company reacted in the opposite way to the movements of the exposure. 6 small amount of change in exposure can cause higher degree of change in profitability and returns. <=6 is the main source of income for the company which accounts for nearly 9.F of the company$s total revenue. The exposure of the company was slightly high during the period of study mainly because of the devaluation of Indian rupee against <=4 in last two years and also the recovery of <= outsourcing business. The company posted increasing revenue during the period of study which could not able to convert into higher profits and returns mainly because of the internal reasons such as higher non-operating expenses in the form of interest cost and the increased cost of goods sold.
65
Ta,$e 4.14: Table showing the forex exposure, >?%E and 6P6T# of T;I:I=?"T& Particulars !D*O%UR! ROC! 7*7TM B/-/ /.9D /.-0 /.-/ B/-/.BA /./. /./B B/-B /.B9 /.B. /./8
Chart 4.1+: %hart showing the forex exposure, >?%E and 6P6T# of Thin!soft
66
7na$ysis: "rom the above analysis it can be observed that the forex exposure of the company was at /.9D in the financial year B//8--/ which was later reduced to /.BA and then to /.B9 in the succeeding financial years. The >?%E and the ad,usted profits of the company initially was at /.-0 and /.- which was later came down to /./. and /./B in "G B/-/--- later again increased to /.B. and /./8 in "G B/----B. Inference: "rom the above table it can be inferred that the company was able to reduce its exposure but the behavior of profitability and returns was different. There was a positive relationship between the exposure and profitability initially but later it turns to be negative relations in "G B/----B. Europe is the main source of business for the company which consistently generating more than ./F revenue to the company. The company has posted the declining growth in profit and returns in the year B/-- mainly because of the crisis happened in the ma,or European <nion regions which adversely affected the company in terms of lesser revenue and profit. The exposure of the company was also reducing during the period of study mainly because of increasing income through I:> (9DF growth*, lesser income in forex from Europe and due to increasing forex expenses. The company had posted nearly 0/F growth in forex expenses which had resulted in reduction of forex exposure.
67
Ta,$e 4.16: Table showing the forex exposure, >?%E and 6P6T# of Infinite %omputers Particulars !D*O%UR! ROC! 7*7TM B/-/ /.D0 /.BA /.BD B/-/.BA /.-9 /.-. B/-B /./1 /.D/.B/
Chart 4.14: %hart showing the forex exposure, >?%E and 6P6T# of Infinite %omputers
60
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the company was at /.D0 in "G B//8--/ which was then reduced gradually to /.BA and /./1 in the succeeding financial year. >?%E and the ad,usted profit of the company initially was at /.BA and /.BD respectively in the "G B//8--/ which was later came down to /.-9 and /.-. in "G B/-/--- and again increased to /.D- and /.B in Inference: "rom the above analysis it can be inferred that, the company reduced its exposure to the greater extent but the returns and profitability was volatile during the same. The company was able to gain maximum when the exposure is either very high or very low. The main reason for reduction of forex exposure to the greater extent in the year B/-B was reduction in the revenue from Europe segment and increase in contracts on <4 dollar basis. The revenue from Europe had posted the decline of /.-/ billion and the company$s contracts in I:> <=4 is equal to 11F which can be interpreted as any deviation in exchange rate will affect the profitability to the greater extent. The return and the ad,usted profit of the company had increased to the greater extent mainly because of the increased revenue from 6sia-pacific region. "G B/----B.
61
Ta,$e 4.18: Table showing the forex exposure, >?%E and 6P6T# of >amco =ystems& Particulars !D*O%UR! ROC! 7*7TM B/-/ /.BA -/./8 -/./B B/-/.-D /./9 -/./B/-B /./1 /./A /./D
Chart 4.16: %hart showing the forex exposure, >?%E and 6P6T# of >amco =ystems
72
7na$ysis: "rom the above table and %hart it can be observed that the exposure of the company was at /.BA in "G B//8--/ which was later reduced gradually to /.-D and /./1 in the succeeding financial years. >?%E of the company was at negative figure of -/./8 which was later increased to /./9 in "G B/-/--- and /./A in "G B/----B whereas the ad,usted profit during the same period increased from -/./B to /./D from financial year B//8--/ to "G B/----B. Inference: "rom the above analysis it can be inferred that the company was able to reduce its forex exposure to the considerable extent which was resulted in increase of returns and profitability to the considerable extent. The company can increase its profitability by reducing the exposure. The forex exposure of the company was reducing mainly because of the increased expenses in the foreign operations. The spending on consultancy and the miscellaneous items in forex had risen significantly during the period of study which had offset the income in forex denomination that has resulted in reduction of exposure. The financial cost and the employee benefits in the year B//8--/ and B/-/--- had been high which resulted in negative >?%E and ad,usted profit. The company could able to post the positive figures at the bottom end in the year B/----B for the simple reason, reduction of financial cost from -D. million to BA million, reduction in trade receivables from 1/1 million to AD- million may also be the main reason for the increase in the profitability.
71
Ta,$e 4.19: Table and the forex exposure, >?%E and 6P6T# of the large cap companies. B/-/ E)P?=<>E >?%E 6P6T# /.9D /.B8 /.-A B/-/.D8 /.B0 /.-. B/-B /.9/ /.DD /.-9
Chart 4.18: %hart showing the forex exposure, >?%E and 6P6T# of E6>5E %6P %?#P6:IE=
72
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the large cap companies remained high at around 9/F during the period of study. The returns of these firms in an average increased to /.DD from /.B8 during the study whereas the profitability was reduced from /.-A to /.-9. Inference: 2ased on the above analysis it can be inferred that the large cap firms were exposed more to the forex fluctuation which had positive correlation on returns but negative impact on the profitability. These large cap companies employed advanced ris! stabili+ing tools li!e netting, leads and lags, forward swaps and cross currency swaps which ensures the lower negative impact from the currency fluctuations. The ad,usted profits of the large cap companies are comparatively lesser than that of mid cap companies mainly because of the si+e of the non-operating income component. The companies li!e T%= and Infosys are continuously ma!ing higher returns and profits on their investments and the derivatives which resulted in increase of non-business income which finally affected ad,usted profit margin.
73
Ta,$e 4.1:: Table showing the forex exposure, >?%E and 6P6T# of mid cap companies. B/-/ E)P?=<>E >?%E 6P6T# /.B0 /.-8 /.D. B/-/.B0 /.-0 /.B/ B/-B /.D/ /.B9 /.B1
Chart 4.19: %hart showing the forex exposure, >?%E and 6P6T# of #I4 %6P %?#P6:IE=
74
7na$ysis: "rom the above table and %hart it can be observed that, the mid cap companies were facing more exposure which was increased from /.B0 to /.D during the period of study. >?%E of these firms had been reduced to negligible extent in the "G B/-/--- but later increased to the considerable extent in "G B/----B. 3hereas the ad,usted profit of the same had been decreased to /.B from /.D. during "G B//8--/ to but later again increased to /.B1 in "G B/----B. Inference: 2ased on the above analysis it can be inferred that the mid cap companies were not able to reduce the exposure which resulted in the volatility of returns and profitability to the greater extent. #id cap companies had the moderate exposure which was the lowest among the three segments (other two being small cap and large cap*. The companies were not so aggressive in their approach towards the income in other country denomination which led them to stabili+e their exposure at less than /.D margins. The ad,usted after tax margin of these companies were also high in the industry which is mainly because of the non-diversity of surplus funds from that of core business. 3hen we loo! at the income from other sources of these companies in their balance sheet it can be observed that the contribution of these to the total revenue in very negligible. "G B/-/---
75
Ta,$e 4.1A: Table showing the forex exposure, >?%E and 6P6T# of small cap companies. B/-/ E)P?=<>E >?%E 6P6T# /.9/ /.-. /.-B B/-/.D/ /.-B /./8 B/-B /.B0 /.-8 /.-/
Chart 4.1:: %hart showing the forex exposure, >?%E and 6P6T# of =#6EE %6P %?#P6:IE=
76
7na$ysis: "rom the above table and %hart it can be observed that the forex exposure of the small cap companies is reduced from /.9 to /.B0 during the period of three years of study. >?%E and the ad,usted profit of the small cap firms had been initially reduced during the "G B//8--/ and "G B/-/--- from /.-. R /.-B to /.-B R /./8 but later it had reversed its movement and increased to /.-8 R /.- in "G B/----B.
Inference: "rom the above analysis it can be observed that the small cap companies able to reduce the forex exposure to the considerable extent but the same do not had considerable influence on the >?%E and profitability. The exposure of the selected small cap companies were considered to be moderate but the >?%E and the profitability remain lesser than that of industry standards. These small companies could able to maintain the good ratio between the E2IT (earnings before interest and tax* and after tax profit but the problem is its proportion of E2IT in the total revenue was very less.
77
Chart 4.1A: %hart showing the volatility of the Indian rupee against 6merican dollar.
7na$ysis: "rom the above %hart it can be observed that the exchange rate between the Indian rupee and <= dollar was varying around -9F during 6pril B//8 which was ended with -AF in the month of "ebruary B/-B. The highest variation was -AF in the month of "ebruary B/-B and the lowest being nil in the month of 6pril in both the year B/-/ and B/--. Inference: "rom the above analysis it can be interpreted that the exchange rate remains highly volatile during the sample period of study with the range of /F to -AF. The prediction of movement was highly difficult and it had impacted the profitability of the Indian firms to the greater extent.
70
Chart 4.2.: %hart showing the volatility of the Indian rupee against Euro.
7na$ysis: "rom the above %hart it can be observed that, the volatility of the exchange rate between Indian >upee and Euro was around -0F during the month of 6pril B//8 which was ended around 0F in the month of "ebruary B/-B. The highest deviation during the period of study was at -0F and the lowest being the /F in multiple period of the financial year B/-/ and B/--. Inference: "rom the above analysis it can be inferred that the exchange rate between the I:> and Euro was highly fluctuating during the period of study where it saw a huge ups and downs in the exchange rate. The movement had no clues for predictions about deviations which would have affected the profitability to the greater extent. The deviations was high during the period of 7une B/-/ where the Europe economies were highly focused by Indian companies as the <= was considered to be most unli!ely mar!et to be concentrated. "rom the period "ebruary B/-- the exchange rates between
71
Impact of currency fluctuation on profitability of Indian IT sector I:> and Euro !eeps on increasing mainly because of the euro crisis which came into light during the early stage of the year B/--.
Chart 4.21: %hart showing the volatility of the Indian rupee against 7apanese yen
7na$ysis: "rom the above %hart it can be observed that the volatility was less than .F during the period 6pril B//8 which was reached the pea! of B9F during the first quarter of the year B/-/--- and the low of /F in many quarter before it ended at 0F in the month of "ebruary B/-B. Inference: "rom the above analysis it can be inferred that the exchange rate of Indian rupee and 7apanese yen was highly deviating during the period of study. It can be observed that the volatility reached almost B.F mar! at one point of time which is considered to be abnormal variation but at the later stage the volatility was minimi+ed and !ept low which may be the effect of the euro crisis.
02
Chart 4.22: %hart showing the volatility of the Indian rupee against 2ritish pound.
7na$ysis: "rom the above %hart it can be observed that the volatility of the exchange rates between Indian rupee and 2ritish pound was at 9F during 6pril B//8 which was later increased to the highest level of -AF during ?ctober B//8 and the lowest of /.0F during ?ctober B/-/ before it ended around -BF during the period "ebruary B/-B. Inference: "rom the above analysis it can be inferred saying that the exchange rates between Indian rupee and 2ritish remain highly volatile during the period of study as it fluctuate to the greater extent with average fluctuation of AF to -/F
01
T!%TIN# OF HB*OTH!%I%: Ta,$e 4.2.: Ta,$e sho>in the su&&ary of fore" e"-osure and -rofita,i$ity
&easures of sa&-$e IT co&-anies:

COMPA NY TCS INFY WIPRO HCL TECH MAH MPHASI S MIND TREE HEXAW ARE FIN TECH INFO TECH POLARI S CAP . Lar ge Lar ge Lar ge Lar ge Lar ge M! M! M! M! M! S" a## EXP O. 2337 2361 2342 2322 2352 2344 2346 2322 2324 2326 2354 2010 RO CE 4234 6 3732 5 2332 6 2234 4 1131 7 3532 1 2734 1 0341 1325 2532 22 APAT M 24313 2327 22317 22310 16343 26314 16302 22333 46322 1731 11325 EXP O. 2336 2350 2342 2315 2344 2321 2342 2322 2322 2327 2344 2011 RO CE 4433 0 3735 0 2233 4 2132 1631 0 2333 1 1034 1 2731 2 0307 1634 2632 1 APAT M 25344 2325 17316 17322 13315 22332 7311 32326 21361 1135 12371 EXP O. 2330 2351 2331 2310 2340 2327 2343 2310 2331 2333 2361 2012 RO CE 5533 1 4230 7 2134 1 3336 4 1632 5 1136 1 2335 7 3533 0 1035 5 22 21 APAT M 26315 2326 14331 21310 0375 17312 11334 2130 62317 1233 12340
Ta,$e 4.21: Ta,$e sho>in the descri-ti1e statistics of the sa&-$ed co&-anies
COMPANY Mea n $3&3 Mea n EXP O. 2333 2322 21 2342 2312 2326 2312 34 2010 RO APAT CE M 2232 25314 1 1136 12321 2 53 2133 16322 1 4301 53652 Management 0 22 1310 1327 4 2371 63054 15 EXP O. 2332 2312 6 2332 2320 3 2313 2311 1 2011 RO CE 1037 0 6310 5 1437 1 7360 5 4337 5315 1 APAT M 11362 13134 2 11326 53134 6 2316 63721 6 EXP O. 2333 2312 2 2333 2322 1 2327 2323 3 2012 RO CE 2236 3 7362 4 2130 3 7375 7 4306 6310 3 APAT M 25344 21324 6 11312 43722 4 02 3316 63223 6
-arge ,ap
Mid cap
$3&3 R V Institute 27 of $mall cap Mea n $3&3
The above tables clearly shows that the large cap companies in the sample were found to have a high level of exposure, ranging from /.BB to /.A-, /.-. to /..0 and /.-0 to /..8 with mean exposure of /.9D, /.D8 R /.9/ and standard deviation of /.-., /.-A R /.-. respectively in the financial year B//8--/, B/-/--- and B/----B. The mid cap companies in the sample were found to have a low moderate level of exposure, ranging from /./9 to /.9A, /.BB to /.9B R /.-0 to /.9D with the mean exposure of /.B0, /.B0 R /.D/ and standard deviation of /.-1, /./0 R /./8 respectively during the same period where the small cap companies had the range of /.BA to /..9, /.-D to /.99 R /./1 to /.A- with mean of /.9, /.D R /.B0 and the standard deviation of /.-, /.- R /.B0. It can be observed that the large cap firms had higher exposure as compare to the mid cap and small cap companies even though it is considered to be a moderate in the industry. The mid cap companies was said to have less exposure among the three segments both in terms of mean exposure and the deviation. The small cap firms were said to have less mean exposure but it remain highly volatile with deviation of up to /.B0 which remains high among the three segments. Ta,$e 4.22: Ta,$e sho>in the a1era e 1a$ues of e"-osure2 ROC! and 7*7TM.
CAPITALISA TION LARGE CAP LARGE CAP LARGE CAP LARGE CAP LARGE CAP MID CAP MID CAP MID CAP MID CAP MID CAP SMALL CAP AVERAGE EXPOS$ RO APAT RE CE M 4733 2337 25324 0 3035 2351 2326 7 2232 2341 17377 7 2532 2310 11353 1 1734 2340 13324 2 2632 2333 21306 4 2331 2343 12324 3 2336 2321 27342 4 1231 2311 42362 6 2132 2321 12317 2 2332 2353 11351
COMPANY TCS INFY WIPRO HCL TECH MAH MPHASIS MIND TREE HEXAWARE FIN TECH INFO TECH POLARIS
03
%orrelation analysis across the sample companies of the "?>E) exposure level with the ad,usted profit after tax margin (6P6T#* Ur N -/.9BV showed that profitability was negatively correlated with the exposure where the companies should minimi+e the exposure to maximi+e the profitability but the correlation with the return on capital employed (>?%E* Ur N /.99V shows the positive correlation which can be interpreted saying that there is a significant level of relation between exposure and the profitability of the IT companies. 6nalysis of coefficient of determination across the sample companies showed that "?>E) exposure had a significant impact on both 6P6T# and >?%E. "orex exposure was found to explain -1F and B/F of the cross sectional variation in 6P6T# and >?%E respectively. Ta,$e 4.2+: descri-ti1e statistics of corre$ation and deter&inants
2010 ROC APAT EXP E M O. 5 2353 23572 62 6 2011 ROC APAT EXP E M O. 5 2352 23115 25 3 2012 ROC APAT E M 2321 25 5 23235 7
PARTIC$LA TS CORRELATI ON
EXP O.
The results of test for significance of correlation indicated that there was significant correlation between the forex exposure and the >?%E of the sampled companies in the financial year B//8--/ and B/-/--- which came down to negligible level in the financial year B/----B. The correlation with ad,usted profit was at negative side in all the three financial years. %orrelation analysis of the change in forex exposure level with the change in 6P6T# and >?%E showed that the change in forex exposure had an impact on the profitability of the IT companies.
Hy-othesis resu$ts:
'et>een Fore" e"-osure and 7d?usted *rofit after Ta" Mar in.
04
Impact of currency fluctuation on profitability of Indian IT sector H.: There is no significant impact of "orex exposure on the 6d,usted Profit after Tax #argin of the firm. H1: There is a significant impact of "orex exposure on the 6d,usted Profit after Tax #argin of the firm.
$!MM R/ Groups %+'#$! R% ' TM ANOVA% Source of Variation 6et7een *roups 8it9in *roups Total Cou nt 15 15 Sum 531236 11 245321 25 Averag e 233422 46 163347 37 Varianc e 2321703 4 1153152 0
SS 112137 1 162335 61 354532 71
df 1 20 21
MS 112137 1 573104 32
F &&.1' 1()
P-value 3353%5 26
F crit 736356 11
7na$ysis and inter-retation: "rom the above tables it can be observed that there is huge variation in the 6P6T# (--..8.* with the mean of -A.D.. The 6:?J6 results conducted for the -. sampled companies at (-,B0* degrees of freedom shows that, the " (variance* value is DD.-B, probability value is D..D and the " critical value is 1.AD.A. The table value for the acceptance re,ection region for the B8 (-, B0* degrees of freedom is 1.A9 which is much below the " cal value. The probability of occurrence is also very high. 2ased on these comparisons it can be said that the result of the test falls outside the acceptance region and thereby re,ect the null hypothesis and accept the alternative hypothesis. Conc$usion:
05
Impact of currency fluctuation on profitability of Indian IT sector "rom the above analysis and interpretation it can be concluded that the foreign exchange exposure has the significant impact on the profitability of the Information Technology firms in India. 6ny change in exposure can lead to the change in profit margin and thereby it is very crucial aspect to be considered in the international business and finance.
'et>een Fore" e"-osure and Return on Ca-ita$ !&-$oyed. H.: There is no significant impact of "orex exposure on the >eturn on %apital Employed of the firm. H1: There is a significant impact of "orex exposure on the >eturn on %apital Employed of the firm.
%UMM7RB: Groups %+'#$!R% R#,% 7NOC7: Source of Variation 6et7een *roups 8it9in *roups Total Count 15 15 Sum 531236 11 332351 33 Averag e 233422 46 223167 56 Varian ce 232170 34 111314 43
SS 357332 36 166032 7 524135 26
df 1 20 21
MS 357332 36 513501 27
F 513172 67
P-value 1315%5 20
F crit 736356 11
7na$ysis and inter-retation:
06
Impact of currency fluctuation on profitability of Indian IT sector "rom the above tables it can be observed that the average of the >?%E for the selected companies is BB.-A1 where it has the variation of --8.-9. The variation value (" cal* calculated for -. sampled companies at /12 2:3 degrees of freedom is .8.81D. The probability value of the test is -.8. and the " critical value for the selected companies is 1.ADA. The table value (1.A9* for the test conducted at -F level of significance for B8 (-, B0* variables is much below the calculated value (.8.81D*. The probability of occurrence of the test result is also high. 2y considering all the above analysis it can be said that the test result for the sampled companies is falls under the critical region therefore we can accept the alternative hypothesis by re,ecting the null hypothesis. Conc$usion: 2ased on the above analysis and interpretation it can be concluded saying that, the foreign exchange exposure has the significant impact on the return on capital employed of the Indian IT companies.
07
6.1 FINDIN#%:
Concentrated on o1erseas &arket: The Indian IT sector is more concentrated on overseas mar!et compare to domestic mar!ets, nearly 1/-0/F of the revenue from the operations of this industry is accounts for exports. !cono&ic factors: %ountries$ economy and their variables are the main concern in foreign exchange' these macro-economic variables such as 54P, inflation rate, interest rates, foreign trade are the main cause for the fluctuation of exchange rates. #ain fro& de1a$uation: The Indian IT sector will be more beneficial if the domestic currency is devalued against the host country currency especially with the ma,or currency such as <= 4ollar, Euro and 2ritish pound. "orex exposure of T%= %ompany remains high during the period of study but it had the positive relationship with >?%E and profit margin. "orex exposure of Infosys remains highest among the selected companies, which had the positive relationship with >?%E but the negative relationship with ad,usted profit. 3ipro$s forex exposure was under the control but the profitability was in downstream mode. ;%E was the least exposed firm to the forex exposure which could able to increase the profitability by reducing the exposure. Tech #ahindra$s exposure remains high at around ./F margin which caused the firm to have minimal returns and profitability. "orex exposure, >?%E and profitability of #phasis were in downturn trend during the period of study which caused lesser returns over the period of time. R V Institute of Management 00
Impact of currency fluctuation on profitability of Indian IT sector #ind tree$s exposure remains high at around 9/F mar! which resulted in lesser returns to the company. ;exaware could able to reduce the exposure which helped the firm to increase its profitability and returns. >?%E of financial technologies topped in the year B//B--/ at 00F which was later came down to B/F margin, the forex exposure and the profitability was increasing during the same period. "orex exposure of InfoTech enterprises saw increasing trend during the period of study which caused the firms in lowering its profitability. "orex exposure of Polaris remains very high at ./ to A/F margin which resulted in low profitability. "orex exposure and the profitability of the ;indu,a global are inversely related. Exposure remains high for the company which caused the reduction in profitability. Thin!soft could able to reduce the forex exposure but the returns and profitability remains low during the period of time. Profitability of the infinite computers remain less even though it could able to reduce the exposure, the >?%E of the company had been raised to the greater extent during the same period. "orex exposure of >amco systems was in downturn during the period of study which helped the firm to increase its profitability and returns. "orex exposure of the large capitali+ation companies remains high around 9/F but the companies$ profitability and returns were not affected to the greater extent. "orex exposure of the mid cap companies had positive relation with profitability and returns. The returns remain high whenever the exposure is high. R V Institute of Management 01
Impact of currency fluctuation on profitability of Indian IT sector =mall cap companies could be able to reduce their exposure to the considerable extent, but the returns and profitability remains low. 6ll the sampled IT companies use derivatives as main tools to offset the side effects of currency exposure. These large cap companies employed advanced ris! stabili+ing tools li!e netting, leads and lags, forward swaps and cross currency swaps which ensures the lower negative impact from the currency fluctuations. Indian rupee was highly volatile during the period of study against ma,or currencies li!e E<>? and 7apanese Gen. The volatility of I:> against <= 4ollar was found to be least as compared to that of the other three as it had the fluctuation of less than -/F in an average during the study.
6.2 CONC=U%ION:
The Indian IT sector is more focusing on the overseas mar!et as nearly 1/-0/F of the business comes from outside India. The ma,or factor affecting the profitability of the IT firms is currency fluctuations, the sales revenue of the sampled IT companies were increasing constantly during the period of study but still the profits were varying to the greater extent mainly because of this exchange rate fluctuation. The result of the study showed that forex exposure was especially alarming for a small fraction of small cap IT companies. The mid cap IT companies had relatively low moderate exposure levels. #a,ority of large cap companies had already hedged their forex ris!, and were not significantly affected by their respective forex exposure. The forex exposure of the companies was found to have improved considerably over the period of time for large and mid-cap companies but it was other way round for the small cap companies' however the exchange rate fluctuations has bought down the revenues of the IT sector by around -/F in the last year. R V Institute of Management 12
Impact of currency fluctuation on profitability of Indian IT sector It was also found that the IT companies had used different hedging tools to manage exchange ris!. =everal companies had ta!en steps to shift their ma,or export interests to mar!ets other than the <=, especially in 6sia and Europe. The companies also used different financial hedging tools such as forwards and options for short period and the currency swaps for longer period.
11
6.+ %U##!%TION%:
#ost of the Indian IT companies are focusing only on few ma,or economies such as <=6 and Europe' this geographical concentration has become one of the ma,or reasons for the huge fluctuation in the exchange rates and variation in profitability, this can be effectively addressed by diversifying the mar!ets. Use of ad1anced too$s: The IT companies can use advanced tools such as nettin 2 cross currency s>a-s2 rein1iocin centers and risk shiftin along with financial derivatives to mitigate the adverse effect of the exchange rate fluctuation.
If the exchange rate movements of two currencies are positively correlated (for
example, the =wiss franc and 4eutsche mar!*, then the firm can offset a long position in one currency with a short position in the other. If the currency movements are negatively correlated, then short (or long* positions can be used to offset each other. Hed in ,a$ance5sheet e"-osure: The balance sheet exposure which is
popularly !nown as translating exposure can be hedged using short term forward contracts. These forward contracts will be helpful to offset Spaper$ gains and losses on the long-term assets and liabilities of foreign subsidiaries. Use &oney &arket hed in too$s: #oney #ar!et ;edge is a technique by which transaction exposure may be hedged by borrowing and lending in the domestic and foreign money mar!ets. 6 firm may borrow (lend* in foreign currency to hedge its foreign currency receivables. Rein1oicin Centers: 6 >einvoicing center is a separate corporate subsidiary that manages in one location all transaction exposure from intra company trade. =ince most of the IT companies in India have their subsidiaries outside this can be a best way to minimi+e their forex ris!. R V Institute of Management 12
Impact of currency fluctuation on profitability of Indian IT sector =mall companies are the most affected segment of Indian IT sector by the fluctuations as the hedging tools employed by them are most common and not so effective in international trade. This can be overcome by using modern hedging tools in the trading activity.
6.4 %CO*! FOR FURTH!R %TUDB:

The study has been limited to the -. IT companies which have been registered with :6==%?#. There are A9 Information Technology firms have been registered with this association and thereby this study can be extended to all other firms which have not been included in the study. 4ue to the time limitation this study is limited only to the three financial years from 6pril B//8 to #arch B/-B. There is a scope to extend this study further from 6pril B/-B onwards. This study is focusing only on analysis of exchange rate ris! associated with the IT companies by neutrali+ing the other macro-economic variables, therefore, this study can be extended to the analysis of impact of those macro-economic factors such as interest rates, inflation, foreign trade etc. on the Indian IT sector. The study is focusing only on the Information Technology sector' it is also true that there are many other industries companies actively involving in multinational operations. Therefore this study can be extended to analy+ing the impact of this exchange rate fluctuation on those industries companies too.
13

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Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

1.1 Introduction to Currency Market:

Impact of currency fluctuation on profitability of Indian IT sector

1.2 History of the Forei n !"chan e:

1.+. Current %tatus of Fore" Market:

Impact of currency fluctuation on profitability of Indian IT sector

;=2% %redit =uisse 5oldman =achs 2:P Paribas

9./8F D.D.F D./.F B.BAF

1.6. 7d&inistration of Forei n !"chan e in India:

)#R%I*( %+," (*% &% -%R $$#,I TI#( #) I(&I

!T"#RI.%& M#(%/ ," (*%R$

!T"#RI.%& &% -%R$

Impact of currency fluctuation on profitability of Indian IT sector

1.9. Forei n !"chan e !"-osure:

1.:. Mana e&ent of Fore" !"-osure and Risk:

Impact of currency fluctuation on profitability of Indian IT sector

2.2 Re1ie> of $iterature:

2.+ %tate&ent of the -ro,$e&:

2.4 O,?ecti1es of the study:

2.6 %co-e of the study:

2.8 O-erationa$ definition of conce-ts:

Impact of currency fluctuation on profitability of Indian IT sector

is the variance of sample - which can be calculated as

variance of sample B which is calculated as

Impact of currency fluctuation on profitability of Indian IT sector

2.A =i&itations of the study:

2.1. Cha-ter sche&e:

Impact of currency fluctuation on profitability of Indian IT sector 'i,$io ra-hy 7nne"ure

Impact of currency fluctuation on profitability of Indian IT sector

+.1 *rofi$e of Indian IT Industry:

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

+.2 %tructure of the IT sector:

+.+ Market %tructure:

Impact of currency fluctuation on profitability of Indian IT sector

+.4 *ROFI=! OF TH! %!=!CT!D COM*7NI!%:

which arises when

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

Impact of currency fluctuation on profitability of Indian IT sector

)#R%I( %+," (% &% -%R $$#,I TI#( #) I(&I

+.4 ROFI=! OF TH! %!=!CT!D COM7NI!%: