The Hindu Business Line : L&T takes Rs 200-crore hit in metals hedging

The details of the deals were not available, but the company said in a statement to the stock exchange: “The company has exposure in commodities and part of it is being hedged by it. As per the unaudited numbers, there could be a loss in commodity hedging of around Rs 200 crore. The actual number will get crystallised on finalisation of accounts.”

Mr Y.M. Deosthalee, Chief Financial Officer, L&T, said that during 2007-08, there has been extreme volatility in the markets, especially in commodity prices. The Sharjah-based subsidiary suffered the loss due to volatility in the commodity markets.

He, however, said what the subsidiary lost on hedging the parent company stood to gain by subdued prices of some commodities. “What we gain in hedging, we lose in the main company or vice-versa.”

Stock pummelled

The company has reduced the exposures to a considerable extent, he said. The news about the losses on account of hedging drove shares of the engineering major down by 12.48 per cent on intra-day on BSE to Rs 2,615. The stock, which was one of the worst losers on the bourses on Monday, closed at Rs 2,728.80, down by 8.68 per cent or Rs 259.40 from the previous close.

“If you look at last year’s figures, we had made a reasonable profit in the hedging activity,” Mr Deosthalee said, adding that the exposure was predominantly on metals. With an order book of over $6 billion, L&T has a huge exposure to commodities, about 40 to 45 per cent, he said.

‘Activity, not business’

He said even after accounting the loss due to this exposure, on a consolidated basis the company would post growth in profits. “Last year, we had made some Rs 150 crore through hedging activity; these people (analysts) had extrapolated the numbers like any other business. We have clarified to them that it is an activity, and not a business.”

Asked about the size of the total commodity exposure, Mr Deosthalee said: “We have completely pared it down, there is nothing now.” He reiterated that the company is maintaining its guidance for growth in order booking and would see improvement in its EBIDTA margins.

L&T, which identified West Asian countries as core growth zones, set up a subsidiary in 2001 at the Hamriyah Free Zone, Sharjah.

L&T International is an investment arm of the parent company for all overseas ventures and also hedges the commodity price risk of group companies by transacting in commodity derivative products. Profits for 2006-07 were Rs 132.91 crore and Rs 53.43 crore in the previous year, and those were mainly from hedging, hire charges and dividends got from subsidiaries.

As of 2007, the Sharjah company had invested Rs 40.75 crore and committed a further amount of Rs 46.80 crore for strategic equipment needed for executing projects in the construction and hydrocarbon sector.

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