Currency Hedging at HCL Tech

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Case Details:

Case Code : FINC074
Case Length : 9 pages
Period : 2007-2009
Pub. Date : 2011
Teaching Note : Not Available
Organization : HCL Technologies Limited
Industry : Information Technology
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"In this quarter (Apr-Jun 2009), we have cancelled some hedges that were to mature by December 2009. These were the same hedges that were taken in late 2007 and early 2008 before the global meltdown took place. But the forex losses are already reflected in the P&L account to the extent these are marked-to-market and the rest are reflected in the balance sheet. They will flow through the P&L over the next seven quarters, irrespective of the cancellation of these hedges." ¹

-Anil Chanana, EVP, Finance, HCL Technologies Limited, May 2009.

On May 16, 2009, one of the leading global IT players in India, HCL Technologies Limited (HCL Tech), announced the cancellation of currency hedging contracts worth US$ 600 million or around Rs. 29.70 billion. The announcement came in the wake of an unexpected rise in the value of the US dollar against the Indian rupee which touched the level of Rs. 52.5 in March 2009. According to industry analysts, the company had taken these contracts during 2007-08 when the rupee was at approximately Rs. 41 against the dollar. Analysts estimated that the cancellation of the hedges would lead to a loss of Rs. 4,000 million to Rs. 5,000 million for the company in the next few quarters, which would subsequently affect the dividend payout.

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HCL Tech, which was known to hedge heavily, had a forward hedge cover of US$ 1.30 billion at the end of the third quarter of FY09.² However, this went down to US$ 813 million at the end of the fourth quarter of FY09. Canceling of forward cover³ was not new to the company - in FY08, it unwound a US$ 540 million cover, incurring a cash loss of US$ 9 million⁴ in the process.

Introduction Contd... >>

1] Shivani Shinde, "HCL Tech Plans to Cancel Rs.3,000 Crore Worth of Hedges," www.business-standard.com/india/storypage.php?autono=358290, May 16, 2009.
2] HCL Tech follows a July to June financial year. Therefore its first, second, third, and fourth quarters ended on September, December, March, and June respectively.
3] Forward cover or forward contract helps the company to lock the price at which it can buy or sell a currency on a future date. However, when expectations go wrong, then the company is forced to unwind the contract and book mark-to-market losses.
4] "HCL Tech Sees $75-m Forex Loss in June Quarter," www.thehindubusinessline.in/2008/07/12/stories/2008071252201000.htm, July 12, 2008.

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