Transcript Wipro Presentation Template

Dealing with VolatilityBuilding an Effective Forex Strategy
NASSCOM BPO Strategy Summit
June 2009
Suresh C Senapaty
Executive Director & CFO
Wipro Limited
Contents
Why FX Risk Mgmt Matters
Anatomy of FX Risk Mgmt
Key Aspects of FX Risk Mgmt
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1. FX Volatility Is The Reality
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8-Jun-04
2.10
INR/USD (June 2004 to June 2009)
GBP/USD (June 2004 to June 2009)
2.00
1.90
1.80
1.70
1.60
1.50
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8-Jun-09
1.40
1.30
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1.62
1.58
1.54
1.50
1.46
1.42
1.38
1.34
1.30
1.26
1.22
1.18
1.14
1.10
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EURO/USD (June 2004 to June 2009)
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8-Jun-07
8-Jun-05
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JPY/USD (June 2004 to June 2009)
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8-Jun-09
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2. Risks of Forex Volatility
1. Risk to rupee EPS for an exporter/importer listed in India
2. Risks to rupee costs for an exporter/importer listed abroad
3. Risks to net cash-flows for a Captive IT/BPO center of an MNC
4. Risks to budget for an India based R&D Center of a Global MNC
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3. Specific to BPO Industry
•
Levers for profitability:
 Pricing
 Resource Management – No of resources & Per person cost
 Seat Utilization
 Attrition Mgmt
 Forex
• 1% movement in Forex will have 0.7% adverse/favorable impact on OM%
• Average BPO industry margins at 12-13%
• Nearly 10% of Forex movement that happened in 2007 (Rs. 45 to 40), shaved off 7%
margins from the business
• Similarly, in 2008, 25% movement from Rs. 40 to 50 added 15-16% margins back
• Now, in May 2009, 6% movement from Rs. 50 to 47, again took away 4% margin.
• Thus, significant impact of Forex on P&L.
• Sharp rapid movements making it difficult to deliver consistent financial performance and
build right business model.
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4. Areas of Impact
From Financials Perspective, impact on:
 Gross Revenues
 Net inflows
 EBIT/PAT
(Gross Rupee Rev = F/C Revenue x current Exchange rate)
(it can be argued economic impact restricted to the extent of net flow)
(due to mismatch in currency of Revenues & currency of Expenses)
 Balance –sheet (Translation impact for F/C current assets & fixed assets)
From Business Perspective:
 Committed orders with frozen pricing
 Committed orders with open pricing
 Run-rate certainty but not committed
Zero hedging will mean Financial Results at spot & assets going through MTM
every period-end
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5. Objectives of Hedging
Reported
Performance
Currency
Movement
Effective Hedging
Revenues/
Profits
Effective Hedging
Constant Currency
Operating Results
Fx Volatility
Timeline
Timeline
Primary Objective of Hedging is to deliver
(a) Reduce the volatility in operating financial performance due to forex
(b) Enhance the predictability of performance
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6. Threats to Effective Hedging
Hedging
Hedging
Hedging
Underlying Exposure
Underlying Exposure
Underlying Exposure
Timing Mismatch
Volume Mismatch
Hence the
Directional Mismatch
Objective of a Corporate Treasury
is to Get these
3 Basic Parameters Right
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7. Type of Forex Instruments
1. Forewards
2. Range-forwards
3. Puts
4. Strips
5. Swaps
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8.Three Aspects of FX Risk Management
Enabling
Policy
Treasury
Objectives
Robust
Processes
Aligned
Accounting
Treatment
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8A. Aligned Accounting Treatment – MTM Vs.
Cashflow
Illustrative Case – MTM vs. Cash Flow Hedge
Forward Rate of
48
for
Aug 2010,
taken a hedge of $1 Mn monthly Sales . Business has Operating margin of 15%
Example: Hedge for Cash-flow from Collection of Debtors
(DSO: 60 days)
Cash-flow
Sept 15, 2009
Sept 30
Dec 31
March 31
June 30
Aug 2010
Forward at
Aug 2010
Forward at
Aug 2010
Forward at
Aug 2010
Forward at
46.50
MTM
C/f Hedge
Balance-sheet
MTM Gain of
43.0
Incr. MTM Gain
Rs. 1.5 Mn
of Rs. 3.5 Mn
MTM Gain of
Rs. 1.5 Mn
Cumulative MTM
Gain Rs.
5 Mn
49.0
Incr. MTM Loss
of Rs. 6 Mn
Cumulative MTM
Loss Rs.
1 Mn
51.0
Incr. MTM Loss
of Rs. 2 Mn
Cumulative MTM
Loss Rs.
3 Mn
Aug 15, 2010
Spot at
48.0
Incr. MTM Gain
of Rs. 3 Mn
Cumulative MTM
Rs. 0 Mn
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8B. Enabling Policy
Type of Exposures
F/C Cashflows
F/C Capital Asset /
Liability
F/C Monetary Asset
Underlying Risks
Economic
Impact on Operating
Performance
Economic/
Pure Accounting
Depending whether it will be
ever paid/realized
Pure Accounting
MTM Shock to Income Statement
Based on Period-End
Exchange Rate
Type of Hedges
Designated Hedge
Capital Hedge
Hedge
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8C. Robust Processes
Policy Control
•Defined Risk Mgmt
Framework &
Documentation flow
•Audit committee oversight
of Treasury Policy
•Clear limits for quantum of
hedges under each category
Independent
Controllership Fn
Optimal Information
Flow
•Independent Back-office
•Robust system as backbone
•Confirmation & Settlement
function under
controllership
•Daily and weekly MIS on
positions through
Independent Middle office
•Documentation for hedging
signed-off jointly by
Controller & Treasurer
•Reporting to Business Mgmt
and Audit committee
•Audits at defined interval of
policy & process adherence
•Constant benchmarking for
best practices and against
changing business needs
Thank You
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