Case 082Budgeting, variance and reportingWarm up

An IT services company's revenue grew 12%. Most of it is billed in dollars and the rupee weakened 5% over the year. What was constant-currency growth?

The situation

Sankalan Infotech, an invented IT services firm, reports revenue up 12% to Rs 5,600 crore. 70% of its revenue is billed in US dollars to overseas clients; the rest is billed in rupees in India. Over the year the rupee weakened 5% against the dollar on an average basis: a dollar that bought Rs 80 last year buys Rs 84 this year.

Management's commentary credits the 12% to strong deal wins. The CFO of a client-side finance team asks you how much of the growth came from the business and how much from the exchange rate.

Your task

What was Sankalan's constant-currency growth, how much did the currency add, and what should the commentary say?

Quick check

Roughly what was constant-currency growth?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Constant-currency growth was about 8.3%, so the weaker rupee added about 3.7 points of the 12%. Of this year's Rs 5,600 crore, Rs 3,920 crore was billed in dollars; at last year's exchange rate it would have been Rs 3,733.3 crore. Total revenue at constant currency is Rs 5,413.3 crore against Rs 5,000 crore last year. Rs 186.7 crore of the reported increase is translation, which no deal win produced.

Step 1What does constant currency actually remove?

Imagine a cousin working in Dubai who sends home the same amount of dirhams each month. If the rupee weakens, the family receives more rupees, but the cousin has not earned more. Constant currency strips out that translation effect by restating this year's foreign revenue at last year's exchange rate. What remains is growth from more clients, more work and better prices, which is what management can take credit for. The translation effectThe change in reported rupee revenue caused only by converting foreign currency revenue at a different exchange rate. is real cash in rupees, but it says nothing about the business and can reverse next year.

Sankalan's revenue rose from Rs 5,000 crore to Rs 5,600 crore: Rs 413.3 crore, or 8.3%, came from the business at last year's exchange rates, and Rs 186.7 crore came from the weaker rupee.

Step 2How do you compute it step by step?

Start with last year: 5,600 over 1.12 is Rs 5,000 crore. Split this year by currency: 70% of 5,600 is Rs 3,920 crore of dollar revenue and Rs 1,680 crore in rupees. Divide the dollar revenue by 1.05, because each dollar now converts into 5% more rupees: Rs 3,733.3 crore at last year's rate. Constant-currency revenue is 1,680 plus 3,733.3, Rs 5,413.3 crore, up 8.27% on Rs 5,000 crore.

The relationship

g_{cc} = \frac{1{,}680 + \frac{3{,}920}{1.05}}{5{,}000} - 1 = \frac{5{,}413.3}{5{,}000} - 1 = 8.27\%

1,680	this year's rupee-billed revenue, 30% of 5,600
3,920	this year's dollar-billed revenue in rupees, 70% of 5,600
1.05	this year's rupees per dollar over last year's, 84 over 80
5,000	last year's revenue

What it says in wordsConverting this year's dollar revenue back at last year's exchange rate leaves Rs 5,413.3 crore, which is 8.3% growth from the business itself.

Step 3Why do the quick shortcuts give the wrong answer?

Two shortcuts are common. Subtracting 5 points from 12 gives 7%, which assumes every rupee of revenue was billed in dollars. Subtracting 70% of 5 points gives 8.5%, closer but still wrong, because the currency effect applies to this year's larger dollar revenue, not last year's. Restating at last year's rate is the only method that reconciles exactly to the reported numbers. The direction of the quoted move matters too: if the rupee had lost 5% of its value in dollar terms, a dollar would cost 1 over 0.95, 5.26% more, and constant-currency growth would be 8.1%. Always ask which rate moved by 5%.

Method	Growth	Problem
12% minus 5 points	7.0%	Treats all revenue as dollar billed
12% minus 70% of 5 points	8.5%	Ignores that the effect scales with this year's revenue
Restate dollar revenue at last year's rate	8.3%	Correct, reconciles to Rs 5,600 crore

Only restating this year's Rs 3,920 crore of dollar revenue at last year's exchange rate gives Sankalan's correct constant-currency growth of 8.3%; both subtraction shortcuts land on a different number.

Step 4What should the commentary say?

Report both numbers and lead with the one management controls. Revenue grew 12% reported and 8.3% in constant currency, with 3.7 points from a weaker rupee. If the rupee strengthens next year, the same business performance will show up as slower reported growth, and investors who were never told the split will read it as a slowdown. Hedging gains or losses on forward contracts are a separate line and should not be mixed into constant-currency growth either.

Where candidates lose it

The usual loss is subtracting the full 5% from 12% and calling the answer 7%, which forgets that 30% of revenue is in rupees and was never translated.

The quieter loss is getting the direction of the currency move wrong. A weaker rupee raises reported revenue, so constant currency must be lower than reported; a candidate who adds the effect instead of removing it has reversed the whole adjustment.

What the interviewer asks next

The rupee strengthens 4% next year and the business grows 9% in constant currency. What is reported growth?
Does constant-currency growth affect how you look at EBITDA margin for an exporter?
Why would an investor prefer constant-currency numbers when comparing two IT firms?

Company names and figures are illustrative.