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Organizational study

BY Akshay Madhava

About the study

The FOREX revenues are a major source for the IT players in India.
The last 14 months has seen a sharp fluctuation in Rupee and Dollar rates.

IT companies are facing a huge problem on account of the volatility in the currency exchange rates.
The major focus is on the IT firms because it is the only industry that has taken a huge beating due to this volatility.

The reason for the IT companies in India to worry is the investment it used to get from the US market.
The rupee has become stronger and the US is looking at other low cost service providers.

About the study (Contd.)

This is one of the biggest issues the IT majors are concerned about. But the impact has not been very big because of careful steps taken by a few IT majors. The IT companies having high FOREX Exposure have made sure that the present slides are not going to affect them as they have indulged in hedging their respective currency risks.

Industry Profile

Over the past decade, the Information Technology (IT) industry has become one of the fastest growing industries in India. The industry accounts for more than a quarter of Indias services exports.

The key segments that have contributed significantly to the industrys exports include Software and services (IT services) and IT enabled services (ITES).
Information Technology Enabled Services (ITES) is a large, fastgrowing worldwide industry fueled by customers seeking efficiency and cost-savings from outside vendors. The chief advantage of India in this market is low cost labor and language speaking skills.

Industry Profile (Contd.)

The Industry is one of the major contributors to the nations GDP. Software & Services will contribute over 7.5% of overall GDP growth of India. IT export will account for 35% of the total exports from India. Potentials for 2.2 million jobs in IT by 2008. IT Industry will attract FDI of US $ 4.5 billion. Market capitalization of IT shares will be around US $ 225 billion.

Industry Profile (Contd.)


MAJOR PLAYERS

Tata Consultancy Services Infosys Technologies Wipro Technologies Satyam Computer Services Patni Computers Systems HCL Technologies Mindtree Services i-Flex Solutions Polaris Software Labs Hexaware Technologies Perot Systems

Company Profile
VISION To be a global leader, committed to the customer in providing the technology solutions with the highest degree of excellence, quality and value by an agile team and efficient process. MISSION To understand and empower client organizations through world-class consulting services in the area of Enterprise Solutions in the context of turnkey development and commercial off-the-shelf packages and also in the area of technology solutions covering Embedded Systems and system Software. To commit us to the highest degree of excellence and customer support with a view to providing superior value to clients.

Company Profile (Contd.)


HIGHLIGHTS & SNAPSHOTS Publicly listed company in INDIA.

500+ employees worldwide.


Global presence- Offices in India, Singapore, USA (Chicago, Cupertino & Detroit), Japan, & UK Certified in ISO 9001:2000 and assessed at CMMI maturity level 3 for all its development and support operations. Industry Vertical: Manufacturing, Oil & Gas, Consumer Electronics, Growth Industries, Telecom, Public Utilities & Retail 52% of customers FORTUNE 500 92% of business is Repeat Business

SWOT ANALYSIS

Research Methodology

Type of Study: The type of research used for the study is descriptive research. Type of Data: Primary and Secondary Data Sources of Secondary Study: White Papers, Websites, Research Articles, Industry Reports

Tool's for Data Collection: Interaction with employees.


Techniques of Analysis: Using statistical techniques and decision models. Sampling plan: Random sampling. Sample Design Period considered for research 2006 to present. The cost of capital for the study has been considered as 15%

Analysis
The information like PAT,ROCE, Sales were collected in order to get a detailed comparison of the FOREX Exposure with different parameters. The analysis also contains the extent of relationship between FOREX Exposure and different parameters. The FOREX Exposure is calculated by using the formula: = h1+ (h1-h2)*(1/r 1). Where, h1= ratio of FOREX Revenues and Total Revenues, i.e, FOREX Revenues/Total revenues. h2 = ratio of FOREX Expenditure and Total Expenditure. r = Weighted average cost of capital of the industry. DATA ANALYSIS.doc

Findings

Majority of the firms covered in this study have already hedged their FOREX risk and are not majorly affected by their respective FOREX exposures. The currency risk has brought down the revenues of the IT sector by around 6%. All the firms dealing in exports and imports are bound to face the impact of fluctuations of the currencies. The companies can cover the risk of currency fluctuation by hedging. The companies use different tools of hedging suitable for them to do away with the currency risk affecting their revenues. Companies hedge using forwards and options if they are looking to hedge for a short period and expect the rates to stabilize soon. If the company wishes to hedge for a longer period it can hedge using swaps.

Suggestions

The company must always keep a watch on the currency rates for changes or stability. ASM Technologies has to be more aggressive in its approach to hedging. Although it has hedged its FOREX risk, it can do it more profitably as told by the company personnel themselves. The company has to focus more on exports and has to target services in the US market as it will be more profitable when the dollar is stronger to the rupee. This is important because ASM Technologies had to forego a contract due to their unpreparedness and lack of buffer employees.

Suggestions (Contd.)

The company has to recruit more employees in the Finance department because there is excess work and the strength of the department is just 5. The employees at ASM have to be subjected to more of language training as they are not very good communicators. Marketing department at ASM focuses more on repeat business and are not aggressive when it comes to new businesses. This has to be seriously looked at appropriate steps taken.

My Learning

The study on Foreign Exchange exposure of different IT companies and the risk associated with the exposure has helped me to understand the extent to which a company can be affected by currency fluctuations. It also helped me to understand different techniques of managing FOREX Exposure risk. It also helped me to understand different methods of hedging and as to how the companies decide on the type of hedging.

My Learning (Contd.)

It has also given me an opportunity to get an insight into the ways various departments in the organization function. It has given me deep insight into different financial instruments like Options, Forwards, Futures etc The study has also helped me in understanding the methods of calculating the FOREX exposure, analyzing the effects of the exposure and interpreting the results thereof.