Narendra Modi’s Win May Have Mixed Impact on IT Industry
Narendra Modi-led BJP’s strong performance in elections has been welcomed by India Inc., which has been rooting for a stable government to pull the country out of the current economic slowdown. However, for India’s over $100 billion IT industry, Mr Modi’s resounding victory brings mixed news.
The softness in domestic demand seen over the last year has impacted IT companies like Tata Consultancy Services – India’s biggest outsourcer, even though revenue from India forms a small part of TCS’ overall business.
TCS sales in North America, from where the company earns 53 per cent of its revenue, grew 28 per cent in 2013-14. India, which contributes just 6.7 per cent of overall sales, grew by a mere 12 per cent during the same period. In dollar terms, TCS sales in India fell (sequentially) in three of the last four quarters.
The decisive mandate for Mr Modi is likely to change things at home. Quick decision making and a turnaround in the economy under the new government will have a positive impact on the IT industry.
“We have got a historic mandate yesterday, a very decisive strong mandate, I’m extremely positive that things will pick up in India much sooner with these results,” said N Chandrasekaran, CEO and managing director of TCS. (Read: TCS Looking at Strong 2014-15 After Poll Verdict)
On the flip side, days of large upsides in margins seem to be limited. Most IT companies, which reported rising profitability through the last fiscal, will be under pressure as the rupee gains strength. The currency hit an 11-month high of 58.63 per dollar on Friday, when results indicated a landslide victory for the BJP.
The rupee is expected to rise on the back of increased foreign inflows into various asset classes (stocks, bonds). Already, foreign investors have pumped in over Rs. 1 lakh crore in the domestic securities market since September 2013, when Mr Modi was announced as the BJP’s prime ministerial candidate. Fast-tracking of reforms will also attract long-term FDI investments and push the rupee up. (FIIs Pour in Rs. 1-Lakh Crore Since Modi Declared PM Candidate)
Like many other exporters, IT firms earn a major portion of revenues in dollars and a stronger rupee will hit margins.
In March, Adam Gilmour, Citigroup said Mr Modi’s win would be a catalyst for a long-term advance in the rupee toward 40 to 45 per dollar, levels last seen in 2008.
While, such a sharp rise in the rupee is unlikely in the short term, IT companies will have to devise new processes to preserve their margins.