As the fiscal fourth quarter comes to a close amidst high currency volatility, Indian IT
companies hope their hedging strategies could like
ly help them protect revenues and
profitability. While some of them have maintained strategies, others have adopted different routes to beat the fluctuation in the forex market.
Infosys, the country’s second biggest IT exporter, is playing it safe by taking a short term view on the dollar-rupee variation, while top exporter TCS and the third biggest Wipro have chosen to hedge their receivables for more than a year.
Infosys has decided to consider a horizon of not more than two quarters as the company expects the rupee would only depreciate over the short term. “Rising fiscal deficit, falling economic growth, widening trade deficit and political uncertainty in view of the elections are likely to keep the rupee weaker,” says Infosys CFO V Balakrishnan.
KN Dey, a director with foreign exchange brokerage Basix Forex, agrees. Although the rupee is likely to strengthen following the latest US bailout announcement, it might close at over 52, by March 2008 end, he said. “The rise in the rupee is more a temporary phenomenon with traders moving their idle funds from currency markets to the local money markets (short-term debt market) because of higher yields,” he added.
Infosys has hedged over $530 million in rolling contracts. The company deals only in range forward options. Under such an arrangement, exposure of an exporter is limited to the range of the option. For instance, if the range is 1.3-1.6 for a dollar-euro contract, then the exporter will get the spot exchange rate as long as it falls in the range. If on the settlement day, the spot rate falls below 1.3, the exporter gets the lower rate of 1.3 and if it moves above 1.6, he gets a higher rate.
Wipro has continued to take longer-term bets in the forex market. “We normally cover 50-100% of net inflows (foreign currency revenue sans foreign currency expenses) for the next four quarters,” said Wipro corporate treasurer Rajendra Kumar Shreemal. Currently, Wipro has $1.8 billion in currency hedges spread over four years until FY 13.
Mid-tier IT company MindTree, which nearly wiped out its net profit in the December 2008 quarter, on account of forex losses, has decided to focus only on plain forward and option contracts. Company CFO Rostow Ravanan says, “Basic hedging philosophy has not changed for us. But, we now have only plain vanilla contracts and have hedged 50% of our recievables.” In the earlier quarters, the company had taken leveraged option contracts, which were riskier in nature.
WNS, the second-largest BPO firm in the country, has changed its hedging policy since the last two quarters from 18 to 24 months due to higher forex fluctuations. “Every month, we reassess our position for next 24 months. We have hedged over 90-95% of our future revenue,” says Alok Misra, CFO of WNS. He adds that the procedure helps to smoothen out the sharp volatility in currency market. The company’s hedging position stands at just over $500 million, which completely covers FY 10 revenue and partially for FY 11.
companies hope their hedging strategies could like
ly help them protect revenues and
profitability. While some of them have maintained strategies, others have adopted different routes to beat the fluctuation in the forex market.
Infosys, the country’s second biggest IT exporter, is playing it safe by taking a short term view on the dollar-rupee variation, while top exporter TCS and the third biggest Wipro have chosen to hedge their receivables for more than a year.
Infosys has decided to consider a horizon of not more than two quarters as the company expects the rupee would only depreciate over the short term. “Rising fiscal deficit, falling economic growth, widening trade deficit and political uncertainty in view of the elections are likely to keep the rupee weaker,” says Infosys CFO V Balakrishnan.
KN Dey, a director with foreign exchange brokerage Basix Forex, agrees. Although the rupee is likely to strengthen following the latest US bailout announcement, it might close at over 52, by March 2008 end, he said. “The rise in the rupee is more a temporary phenomenon with traders moving their idle funds from currency markets to the local money markets (short-term debt market) because of higher yields,” he added.
Infosys has hedged over $530 million in rolling contracts. The company deals only in range forward options. Under such an arrangement, exposure of an exporter is limited to the range of the option. For instance, if the range is 1.3-1.6 for a dollar-euro contract, then the exporter will get the spot exchange rate as long as it falls in the range. If on the settlement day, the spot rate falls below 1.3, the exporter gets the lower rate of 1.3 and if it moves above 1.6, he gets a higher rate.
Wipro has continued to take longer-term bets in the forex market. “We normally cover 50-100% of net inflows (foreign currency revenue sans foreign currency expenses) for the next four quarters,” said Wipro corporate treasurer Rajendra Kumar Shreemal. Currently, Wipro has $1.8 billion in currency hedges spread over four years until FY 13.
Mid-tier IT company MindTree, which nearly wiped out its net profit in the December 2008 quarter, on account of forex losses, has decided to focus only on plain forward and option contracts. Company CFO Rostow Ravanan says, “Basic hedging philosophy has not changed for us. But, we now have only plain vanilla contracts and have hedged 50% of our recievables.” In the earlier quarters, the company had taken leveraged option contracts, which were riskier in nature.
WNS, the second-largest BPO firm in the country, has changed its hedging policy since the last two quarters from 18 to 24 months due to higher forex fluctuations. “Every month, we reassess our position for next 24 months. We have hedged over 90-95% of our future revenue,” says Alok Misra, CFO of WNS. He adds that the procedure helps to smoothen out the sharp volatility in currency market. The company’s hedging position stands at just over $500 million, which completely covers FY 10 revenue and partially for FY 11.
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