The rising rupee is seen denting the EBITDA margins of Indian software companies.

According to a latest UBS Warburg estimate, every one per cent rupee appreciation impacts EBITDA margins by 50 basis points.

Any further currency appreciation would impact the fiscal 2004 margin expectations of the software companies.

All the major software providers such as Infosys Technologies, Satyam Computers and Wipro are likely to be affected.

The UBS Warburg report suggests that companies can hedge receivables up to 60-70 per cent and protect themselves from the negative impact on financial income.

But, it is believed that the negative impact on revenue and EBITDA cannot be managed. Contractually, the software companies are understood to be trying to sign contracts in currencies other than US dollar.

But given the existing pricing pressure in the market, these efforts are likely to be insignificant, the report says.

Some companies have been able to include a rupee exchange rate band in their agreements for downward pricing and this is probably the most they can do, the report said.

Apart from the fact that the appreciating rupee has added pressure on the margins of the software companies, the MNC competition and its impact on incumbents continue to be underestimated, the report says.

"We expect MNC competition to accelerate and impact pricing, costs and also volumes in the medium term," the report said.

Analysts say Infosys and Wipro have already experienced some cost pressures from MNCs. Infosys recently promoted some staff while Wipro expects to hire more senior people.

However, currently, the MNC pricing is on par or lower than market rates, but once the MNCs grow larger, further pricing pressure is likely, the report says.

In the last one month, key stocks such as Infosys, Satyam and Wipro have moved up 10-20 per cent after their sharp fall in April and the recent developments indicate that an upside to company guidance or consensus estimates is very limited, the report said.

The share prices are expected to remain in a narrow range for the next one or two quarters. The global equity firm has cut these stocks' EPS estimates by 2-4 per cent because of their expectations of a strong rupee.

Analysts have also lowered the price targets for Infosys from Rs 3,315 to Rs 3,150, for Wipro from Rs 1,100 to Rs 1,040, while Satyam's pricing remains unchanged at Rs 192.

The reason for maintaining the Satyam price is that with convergence in billing rates and margins, Satyam has very little to lose, the report said.