Global business processing outsourcing and consulting giant Infosys has a unique treasury. While the majority of its staff and operations are in India, the opposite is true on the revenue side -- 98% comes from other countries, most notably North America which contributed nearly 66% of total revenue for the year ending March 31. With so much money coming from abroad, the treasury at Infosys is understandably attuned to foreign exchange risk and hedging its currency positions.
V Balakrishnan, chief financial officer of Infosys, sat down with FinanceAsia and explained how the six-person treasury team at one of India's best managed companies manages millions of dollars in foreign exchange transactions every day.
Please describe the treasury model at Infosys.
We have a simple corporate structure and our operations are structured as a branch in most part of the world. The whole of finance function is centralised in Bangalore, India which is our headquarters.
The treasury function at Infosys is centralised. We have a collection account in most parts of the world where we have operations. We use those collection accounts to make payments in the local markets and hence minimise the currency risk. The surpluses in those collection accounts are pooled on a regular basis and transferred to India. Most of our cash surpluses are kept and invested in India. The long term direction for the Indian currency is to appreciate and also the interest rates in India are high. So, it makes sense for us to keep our surpluses in Indian rupee denominated.
How does Infosys's treasury deal with the rupee-dollar appreciation?
For every 1% movement in the Indian rupee to US dollar rate, there is an impact of around 40 basis points on our margins. We have an active treasury department. In the last one year, we had seen greater amount of volatility in the currency markets. We had taken a view that in a volatile currency environment, there is no point in taking a long-term view on the currency. So, we had taken a decision to cover our net exposures up to two quarters at any point of time. This helped us to considerably reduce the impact of currency volatility on our net income.
Close to 98% of our revenues comes from exports and being denominated in foreign currencies while most of our development activity happens from India and the costs are denominated in Indian rupees. So, we carry a higher degree of currency risk. Roughly, 23% of our revenues come from Europe and hence we carry a considerable amount of cross currency risks also apart from the Indian rupee to US dollar risk.
So how does Infosys manage foreign exchange risk?
As I said earlier, we have a collection account in most of the geographies we operate and we pool all the surplus money after incurring the local expenses into India. Most of our transactions happen electronically and we have built systems to manage that.
We do hedge our foreign exchange exposures through a variety of instruments including the forward contracts and options. We do both plain vanilla and structured options. We hedge our exposure to Indian rupee to US dollar and also the cross currency exposures.
What would you say are the strengths and weaknesses of Infosys's treasury?
We have built a great team for our treasury operations. In the last two years, when the world saw extreme volatility in currencies, we managed it well by making sure that the impact on our net income was minimal. In fact, in the whole industry, I think, we managed the currency volatility more efficiently.
We had greater focus on reducing the Indian rupee to US dollar volatility in the past and had been less active on the crosses. However, we have of late started very actively hedging our cross currency risks. Being a company registered in India, we had certain restrictions on what instruments we can use for hedging our currency exposure and the quantum we can cover. We are working with the regulators to remove some of these impediments to business.
Infosys developed the core banking system and treasury solution Finacle. Do you use this system yourself?
Finacle is a total bank automation product and not a product that can be used by a corporate. In India, most of the banks use this product. In fact, most of the banks with whom we have treasury relationships run on this product. Internally, we had implemented an ERP [enterprise resource planning] system for our financial accounting and also built lots of satellite systems around it to meet our requirements. We had integrated our ERP systems with the banks system for seamless treasury operations.
What future plans do you have for Infosys's treasury?
I think we need to continuously evolve. The business is becoming more and more global which brings with it more complexities. Whether we like it or not, currency markets will remain highly volatile in the near future. The regulations are becoming more and more rigid and compliance has become more rigorous. So, we have to keep evolving and keep adopting the best practices to make sure we are ahead of the game.
