Falling rupee may hurt mobile handset makers

NEW DELHI: The rupee's downward spiral against the US dollar could spell good news for the domestic IT-ITeS sector, which has been facing strong headwinds due to a weak global economy, provided the Indian currency's softening continues.

However, depreciation in the Indian currency, which fell to a life-time low of 58.16 against the dollar, could lead to rise in input costs for handset makers who see their margins eroded by the fall and could be forced to pass on the burden to the consumer, in case the situation persists.

"Rupee depreciation will impact IT and off-shore service providers in a positive way if it sustains for a longer period say for this quarter. It will help in expanding their margins to a certain extent," Gartner Research Director Arup Roy said.

On being asked if the clients will pressurise the service providers (IT & ITeS) for discounts, he said: "The scenario of clients looking to re-negotiate on discounts will only happen if the depreciation in the Rupee continues for a longer time."

Angel Broking Research Analyst Ankita Somani said Rupee depreciating by 1 per cent gives about 30-35 basis points in the operating margins of the IT firms.

"Rupee depreciation in a way is good for the IT firms. Normally the operating margins of these firms is helped by the depreciation," she added.

However, for the middle and low tier mobile makers, the weakening of the Rupee against the US dollar will pinch their margins as most of them import devices or their parts and this could lead to a rise in their input costs.

"There is really a disadvantage for mid-tier and low-tier handsets makers who are importing into India because at that level the price sensitivity to the device price is very high and with the recent depreciation of the rupee that is having a direct impact on retail prices of imported handsets.

"And at low and mid tier, it's likely to have an impact on sales because of the elasticity of demand at that level," PwC India Leader Telecom Mohammad Chowdhury said.

Chowdhury said it is less likely to impact smartphones because the price sensitivity is little less, but added, "I would say is that in longer term if Rupee remains depreciated then there might be an upside benefit for Indian handset manufacturers with respect to exporting to other emerging markets."

One cannot expect these manufacturers to resist price increases because the increase can be absorbed for some time as the margins are not very high, he added.

Lava International Co-founder and Director SN Rai said the situation is affecting the margins of everybody as most of the manufacturers import the components.

"We will watch the situation for a fortnight and if the situations persists, we don't have a choice but to pass the cost to the consumer," he added.