sector can ' t be neglected. The foreign tourists arrival( FTAs) in October 2012 was 5.76 lakh over 5.6 lakh in 2011( y-o-y basis), and growth of 2.9 %. This sector suffers from seasonality and finding a trend for this data was not possible. The data exhibits seasonality and irregularity; however the highest percentage of VAR( value-at-risk), in terms of foreign exchange earnings from tourism, show 49.2 % VAR, i. e. INR 1,681 crores in January 2012.( Source: Ministry of Tourism). The industry has been doing well despite the world economic meltdown and is expected to be doing good in the near term; however fear shall thrive when the trend of slow industrial growth will bottom it out. And in terms of behavioural finance, reluctance is seen to hedge and manage their foreign exchange exposure.
3.2 BANKING SECTOR
Our financial sector as discussed in the previous section needs to be prepared strategically, because of the interdependence between economies. The percentage of foreign bills purchased and discounted over total bank credit has been as high as 81.69 %, which is subjected to the global economic cycle.( Exhibit 6)
3.3 IT INDUSTRY: DETAILED ANALYSIS OF TCS, INFOSYS AND WIPRO
The Indian IT has slowly become a global force to reckon with for its IT Prowess( Exhibit 7). Since almost 60 % of the income comes in foreign currency these firms feel a strong need to hedge them against the foreign exchange risk exposure. In the current scenario it is becoming extremely difficult for IT Companies to sustain their growth momentum. With increasing pressure on the Obama Administration to cut down on the outsourcing to India and increase jobs locally the revenues of Indian IT companies is facing the heat. TCS, Infosys and Wipro etc have large bench strengths of almost 3,75,000 employees resulting in low utilization rates which further affect bottom lines. This is another reason why IT Companies are getting into hedging big time in order to sustain their high growth rates in times of high volatility in business and exchange rates.
The amount of foreign exchange risk exposure a company faces and the degree of hedging it should undertake depends on a number of factors.
1. Firm size – Large firms have economies of scale and hence their hedging costs get greatly reduced. They also have a large risk appetite.
2. Leverage – Firms which are highly leveraged have more incentive to leverage.
3. Liquidity and profitability – High liquidity means lesser exposure
4. Sales growth – Firms having high sales should hedge freely since they do not have debt on their books.
Wild swings in the value of the rupee against the US dollar are making domestic software outsourcing companies go for shorter duration currency hedge. Lower predictability of rupee movement in long-term hedges, IT firms have begun taking shorter term view on currency hedging to pin down foreign exchange( foreign exchange) or hedging losses. The hedging periods range from 1 to 3 quarter. Some analysts say every 1 % appreciation in the rupee impacts an IT company ' s margin by 40-50 basis points( bps).
The paper qualitatively discusses the different hedging strategies of the ' Big 3 ' IT Companies in India: TCS, Infosys and Wipro; in the last couple of years. It studies how these companies manage their exposure to the foreign exchange risks as well as strategic hedging decisions taken by each of the companies. The results are discussed in Exhibit 8.
TCS- TCS gets over 90 % of its total revenue from exports. Major exposures exists in the $/ INR domains. The table( Exhibit 9) shows the volume of foreign exchange transactions at TCS in the last year. TCS had 33 USD Forwards and Options in the year 2011 which indicates that the high volatility in the US Markets may have led to this stand by the firm.
TCS hedges both revenue and balance sheet, mainly receivables. It does not use any discretion in hedging receivables( protects 100 % of receivables)
Infosys- Infosys gets over 98 % of its total revenue from exports. As of March 31, 2012, Infosys had outstanding forward contracts of U. S. $ 677 million, Euro 20 million, United Kingdom Pound Sterling 20 million and Australian dollar 23 million and options of U. S. $ 50 million. While their current hedge ratio( 30.08 %) is significantly lower than their historical average, the impact of currency movement can be judged by a statement in their annual report- ' Every 1 % movement in the Rupee against dollar has an impact of approximately 40bps in operating margin '.( Exhibit 10)
Wipro- Hedging for Wipro is a crucial strategy considering their diversified investment profile. Wipro has a consistent hedging policy, designed to minimize the impact of volatility in foreign exchange fluctuations on the earnings. They mitigate exchange rate exposure arising from these transactions and enter into foreign currency derivative contracts. They follow established risk management policies, including the use of derivatives like foreign exchange forward / option contracts to hedge forecasted cash flows denominated in foreign currency. Its foreign exchange gains /( losses), net for the years ended March 31, 2011 and 2012 were INR 445 million and INR 3,278 million respectively( Exhibit 11).
Looking at the trend till the last year, Wipro seems the most balanced of the 3 companies under analysis:-
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