KPIT reports Rs 90 cr mark-to-market loss

The volatility in cross-currencies "" Euro and Swiss Francs among others "" in the global market has led to market losses in the derivative portfolios of several Indian IT firms. Part of these derivatives were struck to hedge export receivables.

The trend was started with mid-cap IT firm Hexaware Technologies which, before its fourth quarter of the financial year 2006-07, had reported a loss of Rs 102.9 crore in its fourth quarter ended December 31, 2007.

For the current quarter (ended March 31, 2008), the firm again registered a mark to market (MTM) loss of Rs 5.6 crore due to forex derivatives transaction accounting norms.

For the quarter under review, India's second largest IT firms Infosys too reported an MTM loss of $7 million (around Rs 28 crore) on hedging. And today, Pune-based KPIT Cummins reported a MTM loss of around Rs 89.62 crore.

The firm maintained it "has entered into forex derivative transactions to the tune of $42.6 million covering a period of next five years. Apart from a committed (rupee) rupee-dollar conversion rate, the contracts also had a component of contingent premium payment with reference to euro-dollar rates beyond bench-mark euro-dollar rates." Since the firm has not cancelled the contracts as of March 31, 2008, this will be non-cash/notional loss. It is still not clear whether KPIT Cummins had opted for exotic products as a part of its hedging strategy, the way Hexaware had reportedly done.

Market experts feel that since firms do not have a route of INR-Euro hedging, most of them have entered into a triparate agreement "" US-Euro and US-INR""hedging. And since the Euro has appreicated to Euro1.58 against a dollar, many firms have losses on the US-Euro leg.

"Indian IT firms need not get into cross-currency hedging. They just need to hedge the rupee part. But since the probability of the cross-currency hedging turning into losses is rare, most of them went in for this route. But since the Euro, Swiss Franc and Yen all appreciated against the dollar these firms are now registering losses," says an anaylst with a leading brokerage firm who wished to remain anonymous.

"Firms who have a large Europe exposure would most probably be hit by this. But those who have not used Euro for hedging will have gains in their account," said another analysts.

In case of KPIT Cummins, should the contracts be treated as ineffective hedges under the Standard, the MTM loss on these contracts would stand debited to the profit and loss (P&L) account as an exceptional / one-time item.

Should the said contracts be treated as effective hedges, the MTM losses would be provided through reserves without affecting the P&L account.