Impact of Exchange Rate Risk on Performance and Growth of IT companies in India

Abstract

The Information Technology (IT) industry of India has proved its capabilities in delivering both on and offshore services to clients globally over the years. However, the technological advances and innovations taking place at the global level not only present a whole new range of growth prospects, but also challenges for this highly competitive industry. Moreover, the IT sector of India also witnessed the economic recession in 2008, which had an adverse impact on the prospects of this industry. In this scenario, it is imperative for Indian IT companies not only to maintain their focus on increasing their technical efficiencies, but also to deal with the increased competition emanating from the Asia Pacific region. The importance of Indian IT sector demands efficiency usage of resources to compete at global level and provide efficient solutions in the service business. The main objective of this study includes the estimation of relative efficiency of the top 18 selected Indian IT software service companies in order to determine benchmarks, output slacks and target settings for the duration 2010 to 2017 using Data Envelopment Analysis. This study also investigates the factors influencing the performance of IT companies in India and explores the relationship between sales with respect to employee’s compensation and total assets of 37 selected IT companies in India. Furthermore, this study examines the long-term as well as short-term dynamic relationship between IT growth and economic growth of India using quarterly Gross Domestic Product (GDP), aggregate quarterly IT sector Net Sales and aggregate quarterly IT sector Net Profit from 2010Q1 to 2017Q4. Also, since IT companies in India get 90 percent of their revenue from foreign countries, it is imperative to examine the impact of exchange rate volatility on stock prices and profitability of IT firms of India for the duration 2010Q1 to 2017Q4. Data were collected from the Prowess Database provided by the Centre for Monitoring Indian Economy (CMIE), the Bombay Stock Exchange of India and from the Handbook of Statistics on Indian Economy published by the Reserve Bank of India. The analysis was done using Data Envelopment Analysis, Multi-Component Data Envelopment Analysis, Tobit Regression, Cobb-Douglas production function, Co-integration, and Error Correction Model. The results of the study obtained through analysis of DEA revealed mixed trends in efficiency. The top five IT companies exhibited higher efficiency as compared to the rest of the selected IT companies. Tata Consultancy Services, HCL Technologies Ltd. and Tech Mahindra Ltd. is more efficient while Infosys Ltd. and Mphasis Ltd. have lower efficiency. The inefficient companies have to increase their workers’ productivity to become more efficient, have to catch-up and follow the best practices of the benchmark company HCL. The thesis developed a Cobb Douglas Production function which established that compensation to employees and total assets are statistically significant variables explaining productivity of the selected IT companies in India. It also established that IT industry in India exhibits decreasing returns to scale. The results further indicated that output for Indian IT companies is more dependent on labor as compared to capital of the company. The results of the pre-recession period are very similar to our aggregate analysis. However, it was found that during post-recession IT companies became more labor intensive. Subsequently, we estimated panel data with varying intercepts and varying slope. The results indicated that sales turnover function of all IT companies is unique. This study can suggest the policy makers to determine the optimum level of inputs that shall be provided to the sales production function of the company to attain maximum benefits. The results of IT-led growth hypothesis show that there exists no long-run relationship between the quarterly GDP of India and the aggregate quarterly IT sector net sales. However, the quarterly GDP of India and the aggregate quarterly IT sector net profit are co-integrated. In short-run, changes in aggregate quarterly IT sector net profit have a positive impact on short-run changes in the quarterly GDP of India. Further the results of the study also show that Rupee-Dollar exchange rate is a major variable impacting the net profit of IT companies in India. However, the net profit of Infosys and Tech Mahindra are not influenced by the rupee-euro exchange rates. Further, the results also depict that rupee-dollar exchange rate is a major variable impacting the stock prices of all the IT companies in India. The stock prices of Wipro are not influenced by the rupee-euro exchange rates. However, the other IT firms have to hedge its exchange rate exposure not only in rupee-dollar but also in rupee-Euro.