! Wipro has steadily reduced its hedge outstanding to quarterly revenues from Yr. 2009 to Yr. 2011. Infosys is following a very safe strategy of having low hedging activity which is fine during this time of economic uncertainty but is not a long term strategy. TCS does not seem to have a very steady strategy.
! Except during cases of large losses, hedging strategies are not near-term stock price movers. In the longer term, hedging decisions do affect the EPS of a company. However, it is important to hedge foreign currency exposure as far as possible as that should not really be the business manager ' s focus area. Also, in the long term, if the INR is moving consistently in one direction, all one can do is to postpone the impact, but managers then get more time to manage the impact of foreign exchange.
Wipro, TCS and Infosys have different strategies to hedge their foreign exchange exposure( Exhibit 12). TCS hedges both revenue and balance sheet, mainly receivables. It does not use any discretion in hedging receivables( protects 100 % of receivables), but does use discretion while protecting revenue. They take cover mainly in USD, EUR and GBP.
Infosys, on the other hand, hedges just the receivables. Infosys however does not hedge significantly above 100 % of its net receivables. Wipro ' s approach is similar to that of TCS. It usually covers 50-75 % of its net inflows over the following four quarters( which is usually 40-50 % of revenue) and never exceeds 100 % of net inflows. It covers 75-125 % of its balance sheet exposure, mainly receivables.
There is no clear factor which can suggest whether forwards or options are better. Suppose the INR is depreciating. Especially forwards guarantee a certain exchange rate but limits upside if the INR were to depreciate beyond the forward rate. Buying a put option would be ideal— it would guarantee a rate and provide participation in the upside; however, the cost of the option and the liquidity does not make this a practical alternative. The third approach, which the companies usually use, is a range-forward— buying a put and selling a call. This provides a range unlike a single value that a forward provides. Also, the range forward can be structured such that the cost is zero.
TCS largely uses options( range forwards). Infosys usually uses forwards. They used options when the volatility in the rupee was low and even then they used range options to cover itself within an INR range. Wipro predominantly uses forwards. It does use options at times, and uses zero-cost range forwards.
3.4 ACCOUNTING NUANCES AND P & L IMPLICATIONS
3.4.1 P & L impact
Companies use ' non-designated ' and ' designated ' hedges. The mark-to-market impact of non-designated hedges is reflected in the P & L at the end of each quarter. The impact on the designated hedges is carried forward to the balance sheet and reflected in the P & L when the cash flow associated with that particular hedge actually occurs. The effect of both types of hedges will be reflected in the P & L, the impact in case of designated hedges will be deferred if the tenure extends to over two or more quarters.
It is extremely difficult to predict the impact of hedging on the P & L for any given quarter, as factors such as exact hedge book, expiry periods and rates at which hedges are booked are unknown. If a company uses only nondesignated hedges, some back-of-the envelope calculations can be made.
Wipro uses a different accounting approach. Wipro nets its losses on its hedges against revenue while reporting its financials while TCS and Infosys report revenue and EBIT on the actual exchange rate and net off losses below the EBIT line. We understand that the reason Wipro has done so historically has been a SEC requirement that suggests that the hedged items need to be considered as part of revenue. However, both the methods result in the same EPS ultimately but Wipro ' s accounting approach usually tends to suppress reported margins when the INR is depreciating.
3.4.2 Realised rate versus average rate
It must be noted that the realised rate for the company may be quite different from the exchange rate, if the currency movement from the quarter is not uniform. First, the revenue booking is not uniform across the three months of the quarter and is usually skewed slightly towards the last month. Second, companies have different mechanisms to convert revenue booked to the INR. For example, TCS converts the revenue as and when booked. Infosys books it at monthly average rates. Wipro has 3 exchange rates that on the 1st, 11th and 21st of the month, i. e., revenue booked between the 1st and 10th get converted using the exchange rate on the 11th. In addition, Wipro ' s realised rate will differ significantly from the average rate due to the way it accounts for revenue( net of hedge losses / gains).
3.5 Inter-Sector Analysis: BSE-30 Companies
In the current scenario, the Indian companies having a very high market capitalization( large cap) have definite hedging strategies in place. They are generally exposed to two types of risks on their receivables and payables. Forwards are the most convenient hedging instruments
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