The Hindu Business Line : Hedging vital to combat euro depreciation

The recent appreciation of the euro against the Indian rupee has underlined a point that most corporate CFOs intuitively know, but apparently do not always play by: there is a need to be well hedged.

Last year, taking a call on the rupee was a one-way bet. Those who had to receive dollar – such as exporters – were battered, while those who had to make payments in the currency were thrilled. The rupee was going down slightly against the euro, and suggestions about shifting to euro receivables were commonplace.

Now, the complete reversal of the trend in the last few weeks has turned the spotlight on the need to manage currencies better.

Large companies are doing it, while the small ones are flummoxed.

Take, for example, Ashok Leyland, which has derived benefits from both movements. The company has consistently followed a policy of keeping a close watch on currency movements and run to cover the moment things turn adverse.

Accordingly, it is happy that the rupee is depreciating against the dollar — it will get more rupees from each dollar of exports. On the other hand, it is taking advantage of the weakening of the euro and the Yen against the rupee.

“Now we will draw the yen loans and swap it into dollar,” says Mr K. Sridharan, Executive Director – Finance, Ashok Leyland. For sure, there is a price to be paid for the swap, but on the net, the company is a gainer.

Contrast this with a company like M M Forgings Ltd. Half the Rs 200-crore sales of the companies is from exports, but the company does not see merit in maintaining a treasury for its “only Rs 100 crore exposure”. Accordingly, the company follows a policy of hedging – lock-in the receivables at a certain rate and do not be unhappy if some upsides are lost.

Perhaps the positions of Ashok Leyland and M M Forgings represent the extreme ends of currency strategy. Most companies fall in-between. For most of them, hedging is like a pie in the sky and ‘value addition’ and ‘cost control’ are the saviour-mantras.

The Rs 203-crore Sansera Engineering of Bangalore sees the fluctuations in currency rates as a threat. Here, the strategy is to shift to high-value products where competition is limited and a price rise possible. Mr F.R. Singhvi, Joint Managing Director, sees importing sub-assemblies as another option.

Another example is that of Aditya Auto, also of Bangalore, which manufactures window regulators, door latches and wiring harnesses. Its CEO, Mr C. Jayaraman, feels that there is “no alternative but to go full blast on value analysis, value engineering and productivity improvements.” Mr Jayaraman feels there is enough scope for yield improvements.

Our Pune bureau adds:

“Our export business is booked substantially in advance and we have a fixed rupee-euro/rupee-$ rate effective from the beginning of the year. So we are not affected at all by day to day fluctuations in the currency rate,” said Mr Baba Kalyani, Chairman and Managing Director, Bharat Forge Ltd.

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