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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Introduction Contd...

Experts were divided over HCL Tech's decision to cancel its currency forward hedge. According to an analyst, "It's a one-time act that the company is taking to clean up the balance sheet. After this, the numbers can focus on its operations rather than get impacted by currency fluctuations. Of course, this will impact the company's surplus cash reserve as well, as in the next few quarters the dividend payout might get negatively impacted."⁵ According to an ICICI Securities report, the loss on account of cancellation of these contracts would be Rs. 5,200 million at the spot rate of Rs. 49.69 against the hedge rate of Rs. 41. However, according to the management, the cancellation was likely to be spread out.⁶

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The report also mentioned that the loss due to cancellation would be debited in the respective quarters of maturity as against the earlier policy of booking losses in the quarter of cancellation. The report expressed the view that the new policy was fair and in accordance with the US GAAP and that it reduced earnings volatility.

Some analysts held the opposite view. HCL Tech had unwound the covers for the currency forward, putting them in an un-hedge position, as company inflows would be converted at the spot rate. This fundamentally defeated the very purpose of the company’s hedging policy, they said. With the cancellation of the currency hedge, the company might benefit if the rupee continued to further depreciate. Analysts expressed concern about the company's position should the rupee appreciate further against the US dollar. They even opined that this cancellation raised the basic question of how HCL Tech could hedge or manage the currency exposure as most of the revenue came in foreign currency terms.

Excerpts >>

5] Shivani Shinde, "HCL Tech Plans to Cancel Rs 3,000 cr Worth of Hedges," www.business-standard.com/india/storypage.php?autono=358290, May 16, 2009.
6] 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.

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