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Dilemma over hedging receipts — Forex swings fox IT cos

Kripa Raman

Mumbai , July 26

TREASURY departments of software companies are in a flap about the way the rupee seems to be headed the current year.

With the dollar having depreciated against the rupee over a large part of the financial year 2003-2004, software companies made a beeline to the RBI seeking permission to lift the cap on the amounts they could hedge.

But with the dollar-rupee rate swinging both ways, some wonder whether large hedging exposures to mitigate the effects of a hardening rupee are prudent or not.

In December last year, the RBI said that companies were allowed to book forward contracts up to 50 per cent of the average export performance during the last three years or the previous year's turnover, whichever is higher. Also, that any amount booked in excess of 25 per cent of the eligible limit should be on a deliverable basis.

However, larger software companies have been allowed 100 per cent of their export earnings for the previous year.

"This is given on a case-by-case basis. No one has so far been refused," said Mr Kiran At the time of announcement of its yearly results for 2003-2004, Infosys

Technologies had $203 million of export receivables secured with foreign exchange cover at a conversion rate of Rs 43.40 to the dollar. The dollar-rupee rate has reversed since then, with the dollar now quoting at over Rs 46.

"Approximately, every change in a percentage point in the dollar-rupee rate may have an impact of around 50 basis points on the operating margins," said a spokesperson for Infosys Technologies.

"You may imagine the confusion among software companies, who may earn 70 per cent to 90 per cent of their revenue in dollars, wondering which direction of the rupee movement to provide for," said a Nasscom (National Association of Software and Services Companies) representative.

Infosys received permission from the RBI to cover up to 100 per cent of its export earnings for the previous year. Wipro in fact hedged over $900 million for 2003-2004.

"We have provided for the loss on account of forex fluctuations in our first quarter results for FY05," said Mr S Mahalingam, CFO, Tata Consultancy Services.

"When the dollar reached its low of below Rs 44 in March, we had hedged around $ 300 million... we hedge to the extent of oustandings. Now that the rupee is depreciating again, there will be no need to hedge."

When the dollar appeared to be sliding alarmingly, Nasscom too wrote to the RBI to say that exporters faced possibilities of serious erosion in margins.

"Corporates should have full flexibility to hedge their exposure as per the defined risk, management policy approved by the board, similar to their counterparts in the world. To start with, corporates having minimum export revenues of $50 million and net foreign exchange earnings of over 25 per cent in the last three years may be given this flexibility."

A company such as Mastek Ltd follows a very prudent procedure, said Mr Jamshed Jussawala, the Chief Financial Offer.

"We look at hedging to the maximum extent of receivables for 90 days. We have used far less than our limits permit us. We are very conservative."

Other companies are simply asking non-American clients to bill in other currencies as far as possible.

"It looks it is going to be a gamble as to which way we should anticipate the dollar-rupee rate to move," said a CFO of another software company.

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