The sharp depreciation of the rupee might lead to a slump in acquisition activity in the information technology sector, especially for small and medium size players, as foreign purchases become dearer.
While this would not have much impact on large players such as Infosys, TCS, and Wipro, their smaller peers, many of whom are sitting on cash and have been scouting for inorganic growth opportunities, might have to postpone such decisions, said industry experts.
“If we were buying or making an acquisition abroad, the initial cost would certainly go up,” said Ravi Pandit, chairman & group chief executive officer, KPIT Cummins, said.
However, the returns from those investments might be higher due to the weak rupee, he added.
The rupee has depreciated by six per cent in August so far to a record low of 64.11 against the dollar, amid worries over the record current account deficit of India.
Many experts are of the view the Indian unit might see some more weakness in the coming weeks.
“The depreciating rupee is like a double-edged sword for the export-driven IT services sector.
"While on one hand, they are making money because the weaker rupee, this is also expected to increase the cost of acquiring companies and acquiring talents in clients’ geographies,” Sid Pai, president of Asia–Pacific region, ISG, said.
While most software exporters earn a majority of their revenues in US dollars, they typically bring the surplus money back to India, as they get better returns on their cash here, an analyst with a US-based brokerage said.
“So, if they were to make a big ticket investment, and they need to plough back from their cash, they might have a problem,” the analyst added.
Additionally, with signs of revival in the US, valuations of target companies in the region might also head northwards, putting additional pressure on buyouts.
“As the US economy also shows signs of revival, even the dollar-valuations of the target companies might rise, making acquisitions even harder. I think the smaller IT companies that were looking at acquisitions aggressively would be the worst-hit,” said Basudeb Banerjee, research analyst at Quant Broking.