The Hindu Business Line : ‘iGATE improving productivity to manage rupee cost structure better’

Bangalore, Sept. 26 The foreign exchange volatility has hit the fortunes of the small and medium IT services companies the worst. While the subprime crisis in the US did impact iGATE Global’s growth, the advancing rupee was now bringing further pressure on operating margins. Business Line spoke to the iGATE Global Solutions Chief Financial Officer, Mr N. Ramachandran, to assess the impact of the uncertain global environment.

What’s your take on the rising rupee? Where do you see it going?

I expect the rupee to be firm. In the last few days it has gone up against the dollar. That’s essentially a steep reaction to the rate cut announced by the Fed. I expect rupee to stabilise around sub-40 or 40-level

How do you see the rupee impacting iGATE’s operating margins? How are you managing it?

Most IT firms have reconciled to the fact that rupee will be firm in the medium term and they need to do a lot to protect margins. A one per cent appreciation in rupee would impact our margins by 20-25 basis points. We at iGATE have been improving productivity to manage the rupee cost structure better.

Though productivity is important, we need to really handle the bench tightly. In terms of improving our utilisation, there has been a significant progress. On the other hand, we have really focused on services and solution like iTOPS, which don’t have a direct bearing on the headcount.

Also, we are de-risking the currency concentration, something which cannot be achieved overnight, for which we have been working hard. For example in North America, Canada is one area, where we continued to expand and are witnessing a faster growth compared with the US. In fact the Canadian dollar is strong and there is parity between the rupee and Canadian dollar.

We could mitigate our risk by focussing on the European revenues. North America accounts for 70-75 per cent of our revenues of which 15-16 per cent comes from Canada. As long as you have a differentiated model and strong client relationships, one can maintain the margins.

Last two quarters we have done it. Last quarter alone, there was an 8 per cent rupee appreciation and yet we maintained margins. An attempt is being made to trigger a discussion with clients, which should successfully translate into a price hike. Some of our largest customers have supported a price revision, say in range of 2-4 per cent.

Could you elaborate on your strategy for handling the bench?

We used to have utilisation rate of 68-69 per cent earlier, which was quite low. That was primarily because we were structured as a full service provider. Until all our services reached a critical mass, we were forced to have a larger bench. In the past two quarters, we have seen our utilisation improving by 300-400 basis points.

Our utilisation stood at 74 per cent in Q1 this year. We not only expect to maintain that but also improve it further. Further, we expect to tightly control this bench through better allocation, skill set mapping and processes becoming more efficient.

You spoke about managing the rupee-based cost structure more efficiently. How are you going to achieve that?

Yes, we are focussing on managing our rupee cost better. As 77 per cent of our efforts are from offshore locations based in India, a significant salary cost is in the rupee terms. We expect to control our wages through a tightly controlled bench and improved utilisation. Also we expect to manage other costs like selling, general and administrative expenses, which would progressively go down.

How is the perceived US slowdown going to affect you?

It is too early to say on that front. The subprime crisis has not ended and there’s indeed lot more we have to see. Most of the big banks and financial institutions have been putting a brave front. The next two months are critical because many of the US institutions would have to revalue their assets for Q3 in October and November.

Then one would know how much of a hit they have taken due to subprime and related crisis. If some major thing were to happen, it can trigger a slowdown. There could be other implications in terms of consumer spend. But none of our clients have issued any warnings or have talked about it.

Which is a bigger concern for you, US slow down or rupee rise?

Both of them could be a larger issue. A slowdown could affect the discretionary spends of US clients.

Are you facing any price pressure?

No. There’s no any price pressure.

But are you better placed to tackle any kind of a slow down vis-À-vis that of in 2000-01.

Yes we are better placed now. The 2001 slow down may not be comparable as it was an all-round slowdown. Moreover, I don’t think there will be any slowdown.

So, what’s your biggest concern now?

Growing our topline is the biggest challenge. We want to be adding eight-10 Fortune 500 customers every year and we will reach those targets.

Considering the appreciating rupee, would you take a re-look at your hedging strategy?

We have been hedging 100 per cent of six months net cash inflows since October 2005. More lately we have been taking long term covers say for 12-24 months. Our attempt is to hedge 25 per cent of net cash inflows for 12-24 months. Internally, we have a system to benchmark our action. Any other levers you have to protect margins?

Higher margin business with higher bill rates is definitely a lever. Our revenues from high margin business are progressively on the rise.

More Stories on : Interview | Software | Forex

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Indiabulls applies for tele licence; DLF to follow

TN may announce industrial policy soon

DLF plans second IT park in Kolkata

Infosys Q2 results on Oct 11

Russia’s Sistema buys 10% stake in Shyam Telelink

‘iGATE improving productivity to manage rupee cost structure better’

RailTel plans cyber cafes at 82 stations

Ascendas aims to double its space here in 3 years

SWITCH companies account for 1.9% of global IT services