effects of fluctuation in dollars on it sector^

7/29/2019 Effects of Fluctuation in Dollars on It Sector^

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CONTRIBUTOR NAME: DR.DEEPAK JAIN

Research Paper

on

EFFECTS OF FLUCTUATION IN DOLLARS ON IT COMPANIES

AREA: FINANCE

DESIGNATION: LECTURER (MARKETING),

COLLEGE OF MANAGEMENT,

SCHOOL OF BUSINESS,

SHRI MATA VAISHNO DEVI UNIVERSITY, J&K, INDIA

POSTAL ADDRESS: DR. DEEPAK JAIN (LECTURER)

C/o SH. S.K. JAIN,

64/2, K.K. GUPTA LANE,

TRIKUTA NAGAR, JAMMU TAWI (J&K)180018

EMAIL ADDRESS:[email protected]

PHONE NUMBER: 09419112922
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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EFFECTS OF FLUCTUATION IN DOLLARS ON IT COMPANIES

Dr. Deepak Jain (Lecturer, Shri Mata Vaishno Devi University, J&K, INDIA)

Exchange rate is a key determinant in international finance and turning of world into a Global village.Different factors at macro-economic environment were identified and studied that affects demand andsupply of a currency and in return affects the exchange rate. Some identified factors are: Interest Rates,Rate of Inflation, Political or Military Unrest, Domestic Financial Market, Strong Domestic Economy,

Business Environment, Stock Markets, Economic data, Balance of trade, Government budgetdeficits/surpluses, and Rumours. Recently another factor added is Terrorism.

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

Positive correlation is seen between the fluctuations in Exchange rate of dollars (acting as independentvariable) and revenue value (acting as dependent variable) as the average correlation value of 12 IT

companies is 0.690423305 which is higher than 0.5 representing the overall impact of exchange risk onIT industry. The companies are not seems to be taking hedging risk cover which is reflected in theirdecrease in revenues.

KeywordsExchange Rate, Forex Markets, Inflation, Demand & Supply, Revenue, Turnover, RBI, US$, InterestRates, Currency, Stock Markets, and Economies etc.

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

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

Price determination

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

Factors affecting the demand and supply

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

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


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

Political or Military UnrestAll exchange rates are susceptible to political instability and anticipations about the newgovernment. All the market players get worried about the policies and may start unwinding their

positions thereby affecting the demand and supply.

Domestic Financial MarketStrong domestic financial markets will also lead to the strengthening of domestic currency asinvestors will be less worried about their investments and vice versa.

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

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

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

Economic dataEconomic data such as labour reports (payrolls, unemployment rate and average hourly earnings),Consumer Price Indices (CPI), Gross Domestic Product (GDP), International Trade, Productivity,

Industrial Production, Consumer Confidence etc, also affect fluctuations in currency exchangerates.

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

Government budget deficits/surplusesIf a government runs into deficit, it has to borrow money (by selling bonds). If it can't borrowfrom its own citizens, it must borrow from foreign investors. That means selling more of its

currency, increasing the supply and thus driving the prices down.

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

TerrorismInstances of Afghanistan war and 9/11 attack on World Trade Centre of America affected thetrades between America and Asian countries.

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

Start date: 2003 Term of contract: 5 years


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Total Contract Value (TCV): US$50 million with equal annual payoutsLet us assume for the sake of simplicity, that the supplier bears all the currency exchange risk. Undersuch a scenario, the supplier in 2003 is facing five years of paying out wages and other costs in INR;therefore, the supplier is "short" the rupee. At the same time, the supplier is holding an accountsreceivable of five years of revenues in dollars; therefore, it is "long" the dollar. Being long the dollar andshort the rupee, the supplier is hurt when the rupee rises relative to the dollar. Given the rupee

appreciation that we have seen over the last five years, under such an agreement, the supplier would haveexperienced INR 94 million currency exchange loss if you compare the actual realized fee versus theexpected supplier fees. This translates into a net negative currency impact of four percent on the top line(see Exhibit 1).

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

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

In 1999, Goldman Sachs (BRIC Report) predicted that India's GDP at current prices will overtake that ofFrance and Italy by 2020 and that Germany, UK and Russia by 2025. By 2035, India is expected to be of3rd largest economy in the world behind US and China overtaking Japan. Goldman Sachs had made thesepredictions based on India's expected growth rate of 5.3% to 6.1% in various periods in the past, atpresent India is registering 8.6% growth rate. Jim O'Neal, head of the Global Economics Team atGoldman Sachs, had said on the BBC, "In thirty years, India's workforce could be as big as that of theUnited States and China combined". He added that "India could overtake Britain and be the world's fifthlargest economy within a decade as the country's growth accelerates".

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

However, the BRIC (Brazil, Russia, India, China) report ignored the effect of rapid decline in PurchasingPower Parity ratios of economies as they approach maturity, resulting in PPP that eventually tends toward1.0 (as compared to nearly 5.0 for India and China in this current year i.e. the value of 1 US$ in India andChina after conversion into local currency at currency exchange rates was 5 times of that in the US due to

their cheaper currencies).

This decline is attributed to the following:

Inflation Appreciation of the local currency


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Normally, currencies appreciate when the economies are doing well and the rise in their value is a causefor celebration. The high value of the Deutsche Mark when Germany was the trendsetter for the worldeconomy in the 1960s and the 1970s, the high value of yen in the 1980s when Japan seemed set to takeover the world and the dollar's high value in the late 1990s when the US economy brooked nocompetition were sources of immense pride for their respective countries.

The Indian journey from 1990s to the mid 2000s:

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

The recent strengthening of the rupee is a dramatic departure from the past trends. The currencydepreciated steadily for a decade after being floated in 1993, dropping from an average annual rate of Rs.31.37: US $1 in the 1993-94 fiscal years (April-March) to Rs. 48.40: US $1 in 2002-03 (an averageannual depreciation of nearly 5%). Between 2003-04 and 2005-06, however, the rupee appreciated

against the dollar by 3% an on average a yearalthough there was considerable two-waymovement of the rupee from month to month. The trend of steady month-on-month appreciation

began in September 2006 and has been continuous since then.

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

Background for Research Work

Introduction

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

India

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

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

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

Many North American and European companies that started their own offshore set-up in India to lower

the cost of product development or back-office struggled due to spiralling costs, rising attrition, lack ofintegration and management support. In fact, the rupee's appreciation against the dollar has claimed itsfirst victim in the business process outsourcing space. US-based Spectrum Global Fund Administrationthat provides back-office operations to hedge funds in the U.S. and the U.K. is closing its facilities inIndia. The company had started its operations there only two years ago.


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

The domestic IT-BPO firms have devisedmany strategies to combat the approximately15 percent annual climb in wages. Some ofthe strategies include hiring freshers, studentswith non-engineering backgrounds,establishment of operations in tier-II and tier-III cities, increased billing and employeeutilization rates, and improving the businessmix to increase productivity and to beat theheat of the rising salaries. Industry analystsbelieved that with these strategies, coupledwith an indexed wage differential, the IT-

BPO firms should be able to retain theircompetitive edge in outsourcing for at leastanother 10-15 years.

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

Objectives of Study

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

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

risks in the IT industry.

Time period considered to study

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

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

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

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

Research MethodologyResearch Design

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


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Exploratory research design is used to answer the Objective Number 1:

To find out the reason behind the fluctuation in exchange rate by studying the past trend.Causal research design is used to answer the Objective Number 2:

To find out whether the fluctuation in exchange rate affects revenue turnover of IT company,or not.

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

Nature of Data

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

As the objective is to find out whether the fluctuation in exchange rate affects the revenue turnover of

the IT sector, correlation technique was used for data analysis.

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

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

Reason why the Indian rupee appreciated?

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

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

fiscal year (December 2006-March 2007).

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

Foreign portfolio inflowsIndia's booming stock market embodies the confidence of investors in the country's corporate

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


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

Investments and remittancesIndians settled in other countries have also been a major source of capital inflows, with manynon-resident Indians (NRIs) investing large amounts in special bank accounts. While NRIsemotional connection to their country of origin is part of the explanation for this, the attractive

interest rates offered on such deposits have also provided a powerful incentive. In 2006-07, NRIdeposits amounted to US $3.8bn, a 35% increase over the previous year; the outstanding value ofNRI deposits as of end-March 2007 was US $39.5bn. Another large source of foreign-exchangeinflows has been remittances from the huge number of Indians working overseas temporarily.Such remittances amounted to a colossal US $19.6bn in April-December 2006, a 15% year-on-year increase.

Is it is advantageous to have appreciating rupee always?

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

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

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

Government reservesConsidering that the government has been selling its stake aggressively in major public sectorunits in the recent past, and with a substantial chunk of this being subscribed by FIIs, the latterwill have to invest more dollars to pick up a stake in the company being divested, thus aiding thegovernments build up of reserves.

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

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

Dollar denominated earnings hurtThe strengthening rupee has an adverse impact on various companies/sectors, which derive a

substantial portion of their revenues from the US markets (or in dollar denominations). Softwareand BPO are typical examples of the sectors adversely impacted by the appreciation of rupee.


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Data Analysis & Interpretations

There exists high degree of positivecorrelation between fluctuation inexchange rate and revenue turnoveri.e. 0.793.

This infers that revenue turnover ofAftek Computers is affected by

79.3% because of fluctuation inexchange rate.

44.945.4

46 46.246.5

45.7 45.5

44.9 44.844.3 44.2 44

42.2

40.7 40.840.4

40.840.3

39.5

36

38

40

42

44

46

48

Ruppee

per1USD

Months

Figure1: Variation in Value of Rupee Against $

10979944048

9660232171

7631264173

9530559432

13799140987

12008705530

10985709752

6465767812

4627487104

3937612119

2107681409 2210198537

3289317532 3067227407

1653055009

3466251344

2202129447

3248718273

1855966200

2E+09

4E+09

6E+09

8E+09

1E+10

1.2E+10

1.4E+10

1.6E+10

TurnoverinRupp

ees

Months

Figure2: Aftek Computers Ltd.

Correlations

Exchange Rate Revenue Turnover

Exchange

Rate

Pearson Correlation 1 .793**

Sig. (2-tailed) .000

N 19 19

Revenue

Turnover

Pearson Correlation .793** 1


N 19 19

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


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This infers that revenue turnover ofInfosys is affected by 76.7% becauseof fluctuation in exchange rate.


This infers that revenue turnover ofTCS is affected by 79.7% because offluctuation in exchange rate.

19343184965

18715493047

28031574936

33187016506

39096129278

40396617276

25152130990

21092246495

33052878781

30176122837

16209046179

25501467909

19962285896

1098024938511781532480

1868471534019711450578

13736975830

11630281584

0

5E+09

1E+10

1.5E+10

2E+10

2.5E+10

3E+10

3.5E+10

4E+10

4.5E+10

Total

turn

over

in

(Rs.)

Months

Figure3: INFOSYS

7519573186

5969400779

6429868218

11091703588

11358497887

7257036657

6646799909

5545469812 5547330775

6276745421

6860803142

5144670406

5681572609

4311629503

30465622713358894818

4922071205

4434513667

3075678270

0

2E+09

4E+09

6E+09

8E+09

1E+10

1.2E+10

TurnoversinRuppees

Months

Figure4:Tata Consultancy Services

Correlations


Exchange

Rate



N 19 19

Revenue

Turnover



N 19 19


Correlations


Exchange

Rate



N 19 19

Revenue

Turnover



N 19 19



11/17


This infers that revenue turnover ofWipro is affected by 86.4% becauseof fluctuation in exchange rate.


This infers that revenue turnover ofPolaris Softwares Lab Limited isaffected only by 52.8% because offluctuation in exchange rate.

86834813118685955743

7538971790

8905597889

9732301123

5960749713

4627134996

5126679386 5316744258

51714700314658310328

6040409835

3981111110

4186674755

2726008230

2296473466

2286685248

1954909436

2159567240

0

2E+09

4E+09

6E+09

8E+09

1E+10

1.2E+10

Turnove

rin

(Rs.)

Months

Figure5:Wipro

463904206

991565269

383430426

2623231704

3560753809

1177410836

949356636

1073808544

770635836

389137594

622704766

991241540

574781814

689903450

376934053

764443258706222936

400005739

294390007

0

500000000

1E+09

1.5E+09

2E+09

2.5E+09

3E+09

3.5E+09

4E+09

TurnoverinRuppees

Months

Figure6: Polaris Software Lab Ltd.

Correlations


Exchange

Rate



N 19 19

Revenue

Turnover



N 19 19


Correlations


Exchange

Rate



N 19 19

Revenue

Turnover

Pearson Correlation .528** 1Sig. (2-tailed) .000

N 19 19



12/17

There exists high degree of positivecorrelation between fluctuation inexchange rate and revenue turnover i.e.0.831.

This infers that revenue turnover ofMastek Softwares Linited is affected by83.1% because of fluctuation inexchange rate.


This infers that revenue turnover ofHexaware Technologies Limited isaffected by 51.9% because offluctuation in exchange rate.

19029204308

13886145289

15684050286

24127075849

26593533104

22762187906

19969849085 18915090909

8493228790

5710470477

6742531754

2476742597

3442901350

4198604793

2982295897

5563505543

3584450500

1048317875 895932735

0

5E+09

1E+10

1.5E+10

2E+10

2.5E+10

3E+10

Turnoversi

nRuppees

Months

Figure7: Mastek Softwares Ltd.

4187626062

2937285474

1815413514

2774140286

10152493322

6869243313

4323724483

3064409125

20693442391439809758 1380014996

2444031305

3721535225

4575421387

1105012417

1926790676

1032617367

709707863528937586

0

2E+09

4E+09

6E+09

8E+09

1E+10

1.2E+10

Tu

rnoverinRuppees

Months

Figure8: Hexaware Technologies Ltd.

Correlations


Exchange

Rate



N 19 19

Revenue

Turnover



N 19 19


Correlations


Exchange

Rate



N 19 19

Revenue

Turnover



N 19 19



13/17


This infers that revenue turnover ofCMC Ltd is affected by 64.9%because of fluctuation in exchangerate.


This infers that revenue turnover ofHCL Technologies Ltd is affectedby 41.8% because of fluctuation inexchange rate.

257152826

473628558

182718078

328644792

953061823

396202001

304608913

396202001

304608913

111971789

155946533

30520041

99088296

66863191

135032798

58861291

38096352

182000421

841826660

200000000

400000000

600000000

800000000

1E+09

1.2E+09

Turnoverin

Ruppees

Months

Figure9: CMC Ltd.

1025650571

2994952763

2791973878

3379920881

7622917235

4909325131

2702600602

1609597689

1003803420 1026296865

2289192314

14114064041253705359

1436617481

1471479728

3634389603

2972467716

1479595919

1000328438

0

1E+09

2E+09

3E+09

4E+09

5E+09

6E+09

7E+09

8E+09

9E+09

Tu

rnoverinRuppees

Months

Figure10: HCL Technologies Ltd.

CorrelationsExchange Rate Revenue Turnover

Exchange

Rate



N 19 19

Revenue

Turnover



N 19 19


Correlations


Exchange

Rate



N 19 19

Revenue

Turnover



N 19 19



14/17


This infers that revenue turnover ofPatni Computers (P) Ltd is affectedby 71% because of fluctuation inexchange rate.


This infers that revenue turnover ofSatyam Computers Services Ltd isaffected by 75.3% because offluctuation in exchange rate.

1449344861

1080244041

905325178

1325866099

2122549804

748022016

877027912

668885137

799380597

606912747

147176569

354310391

494344837

370105529

401055719

217933544

481592551392206447

201861845

0

500000000

1E+09

1.5E+09

2E+09

2.5E+09

Turnoverinrup

pees

Months

Figure11: Patni Computer Systems (P) Ltd.

25301398938

2451445239424648316900

38530494040

39963498247

35801602322

32179872246

19373368636

22034854910

22034854910

27061354437

15530498478

11957091363

19541374597

18474826187

22294443088

14758107133

11555526857

13925949228

0

5E+09

1E+10

1.5E+10

2E+10

2.5E+10

3E+10

3.5E+10

4E+10

4.5E+10

TurnoverinRuppees

Months

Figure12: Satyam Computer Services Ltd.

Correlations


Exchange

Rate



N 19 19

Revenue

Turnover



N 19 19


Correlations


Exchange

Rate



N 19 19

Revenue

Turnover



N 19 19



15/17


This infers that revenue turnover ofNucleus Software Ltd is affected by65.7% because of fluctuation inexchange rate.

Analysis Summary

131199917

129708800

296682811

704390913

742495523

323072635

407647674

504118285

400295832

392724552

373941371

332600525

255675098

417249203

111285674

176548950

99960542

73904590 26576118

0

100000000

200000000

300000000

400000000

500000000

600000000

700000000

800000000

TurnoverinRuppees

Months

Figure13: Nucleus Software ltd.

CorrelationsExchange Rate Revenue Turnover

Exchange

Rate



N 19 19

Revenue

Turnover



N 19 19


MONTHTable1: Foreign Revenue Turnover (in Rupees)contd..

$ Value AFTEK INFOSYS TCS WIPRO POLARIS MASTEK

Apr-06 44.9 10979944048 19343184965 7519573186 8685955743 463904206 19029204308

May-06 45.4 9660232171 18715493047 5969400779 8683481311 991565269 13886145289

Jun-06 46 7631264173 28031574936 6429868218 7538971790 383430426 15684050286

Jul-06 46.2 9530559432 33187016506 11091703588 8905597889 2623231704 24127075849

Aug-06 46.5 13799140987 39096129278 11358497887 9732301123 3560753809 26593533104

Sep-06 45.7 12008705530 40396617276 7257036657 5960749713 1177410836 22762187906

Oct-06 45.5 10985709752 25152130990 6646799909 4627134996 949356636 19969849085

Nov-06 44.9 6465767812 21092246495 5545469812 5126679386 1073808544 18915090909

Dec-06 44.8 4627487104 33052878781 5547330775 5316744258 770635836 8493228790

Jan-07 44.3 3937612119 30176122837 6276745421 5171470031 389137594 5710470477

Feb-07 44.2 2107681409 16209046179 6860803142 4658310328 622704766 6742531754Mar-07 44 2210198537 25501467909 5144670406 6040409835 991241540 2476742597

Apr-07 42.2 3289317532 19962285896 5681572609 3981111110 574781814 3442901350

May-07 40.7 3067227407 10980249385 4311629503 4186674755 689903450 4198604793

Jun-07 40.8 1653055009 11781532480 3046562271 2726008230 376934053 2982295897

Jul-07 40.4 3466251344 18684715340 3358894818 2296473466 764443258 5563505543

Aug-07 40.8 2202129447 19711450578 4922071205 2286685248 706222936 3584450500

Sep-07 40.3 3248718273 13736975830 4434513667 1954909436 400005739 1048317875

Oct-07 39.5 185596620 11630281584 3075678270 2159567240 294390007 895932735

Correlation 0.793293886 0.766382615 0.796693709 0.864349643 0.527763087 0.83124443

AverageTurnover 5845084142 22970600015 6025201164 5265222941 937045390.7 10847690476

Lowest /

HighestTurnover

185596620 /13799140987

10980249385 /40396617276

3046562271 /11358497887

1954909436 /9732301123

294390007 /3560753809

895932735 /26593533104

Degree ofCorrelation High High High High Moderate High


16/17

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

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

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

One must note that impact of different external variables present at both macro and micro level cannot beignored while making interpretation. We can further interpret that though the turnover of those sixcompanies may not be lowest in October 2007 when value of dollar is lowest, but there turnover reduced

significantly if compared with there highest turnover value during the period of study. This trend simplyfavours and proves that the fluctuation in dollars has a severe impact on the IT industry.

Positive correlation is seen between the fluctuation in dollars (acting as independent variable) andrevenue value (acting as dependent variable) as the average correlation value of 12 IT companies is0.690423305 which is higher than 0.5 representing the overall impact of exchange risk on IT industry.

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

SuggestionsAnalysis revealed a positive correlation exists between the independent variable and the dependentvariable. Suggestion to companies is that they should use the combination of hedging instruments like

MONTH

Table1: Foreign Revenue Turnover (in Rupees)

DOLLAR

VALUEHEXAWARE CMC HCL PATNI SATYAM NUCLEUS

Apr-06 44.9 4187626062 257152826 1025650571 1449344861 25301398938 131199917

May-06 45.4 2937285474 473628558 2994952763 1080244041 24514452394 129708800

Jun-06 46 1815413514 182718078 2791973878 905325178 24648316900 296682811

Jul-06 46.2 2774140286 328644792 3379920881 1325866099 38530494040 704390913

Aug-06 46.5 10152493322 953061823 7622917235 2122549804 39963498247 742495523Sep-06 45.7 6869243313 396202001 4909325131 748022016 35801602322 323072635

Oct-06 45.5 4323724483 304608913 2702600602 877027912 32179872246 407647674

Nov-06 44.9 3064409125 396202001 1609597689 668885137 19373368636 504118285

Dec-06 44.8 2069344239 304608913 1003803420 799380597 22034854910 400295832

Jan-07 44.3 1439809758 111971789 1026296865 606912747 22034854910 392724552

Feb-07 44.2 1380014996 155946533 2289192314 147176569 27061354437 373941371

Mar-07 44 2444031305 30520041 1411406404 354310391 15530498478 332600525

Apr-07 42.2 3721535225 99088296 1253705359 494344837 11957091363 255675098

May-07 40.7 4575421387 66863191 1436617481 370105529 19541374597 417249203

Jun-07 40.8 1105012417 135032798 1471479728 401055719 18474826187 111285674

Jul-07 40.4 1926790676 58861291 3634389603 217933544 22294443088 176548950

Aug-07 40.8 1032617367 38096352 2972467716 481592551 14758107133 99960542

Sep-07 40.3 709707863 182000421 1479595919 392206447 11555526857 73904590

Oct-07 39.5 528937586 84182666 1000328438 201861845 13925949228 26576118Correlation 0.519423931 0.648995857 0.417719079 0.709928617 0.752749906 0.656534905

AverageTurnover 3003029389 239967962.3 2421906421 718112938.1 23130625522 310530474.4

Lowest /Highest

Turnover528937586 /10152493322

30520041 /953061823

1000328438 /7622917235

147176569 /2122549804

11555526857 /39963498247

26576118 /742495523

Degree ofCorrelation Moderate Moderate Moderate Moderate High Moderate


17/17

Option along with forward hedging instruments to save them against exchange risk and will also helpthem to raise more debt as hedged firm are considered safer than unhedged firm.

Limitations

The study is restricted to only 12 organizations only. Moreover, there are many factors present at bothmacro and micro level that impacts revenue turnover and there impact cannot be ignored while makinginterpretation. Analysis was conducted assuming all those factors as constant and studied the impact of

fluctuation in dollars on revenue turnover of IT companies.

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effects of fluctuation in dollars on it sector^

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