Suresh C Senapaty Executive Director & CFO Wipro Limited

Dealing with Volatility-Building an Effective Forex StrategyNASSCOM BPO Strategy Summit

June 2009

Suresh C SenapatyExecutive Director & CFO

Wipro Limited

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Contents

Why FX Risk Mgmt Matters

Anatomy of FX Risk Mgmt

Key Aspects of FX Risk Mgmt

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1. FX Volatility Is The Reality

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2. Risks of Forex Volatility

1. Risk to rupee EPS for an exporter/importer listed in India

2. Risks to rupee costs for an exporter/importer listed abroad

3. Risks to net cash-flows for a Captive IT/BPO center of an MNC

4. Risks to budget for an India based R&D Center of a Global MNC

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3. Specific to BPO Industry

• Levers for profitability:

Pricing

Resource Management – No of resources & Per person cost

Seat Utilization

Attrition Mgmt

Forex

• 1% movement in Forex will have 0.7% adverse/favorable impact on OM%

• Average BPO industry margins at 12-13%

• Nearly 10% of Forex movement that happened in 2007 (Rs. 45 to 40), shaved off 7%

margins from the business

• Similarly, in 2008, 25% movement from Rs. 40 to 50 added 15-16% margins back

• Now, in May 2009, 6% movement from Rs. 50 to 47, again took away 4% margin.

• Thus, significant impact of Forex on P&L.

• Sharp rapid movements making it difficult to deliver consistent financial performance

and build right business model.

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4. Areas of Impact

From Financials Perspective, impact on:

Gross Revenues (Gross Rupee Rev = F/C Revenue x current Exchange rate)

Net inflows (it can be argued economic impact restricted to the extent of net flow)

EBIT/PAT (due to mismatch in currency of Revenues & currency of Expenses)

Balance –sheet (Translation impact for F/C current assets & fixed

assets)

From Business Perspective:

Committed orders with frozen pricing

Committed orders with open pricing

Run-rate certainty but not committed

Zero hedging will mean Financial Results at spot & assets going through

MTM every period-end

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5. Objectives of Hedging

Currency Movement

Timeline

Fx Volatility

Effective Hedging

Primary Objective of Hedging is to deliver

(a)Reduce the volatility in operating financial performance due to forex

(b)Enhance the predictability of performance

Revenues/Profits

Timeline

Constant Currency Operating Results

Effective Hedging

Reported Performance

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6. Threats to Effective Hedging

Volume Mismatch

Underlying Exposure

Hedging

Timing Mismatch

Underlying Exposure

Hedging

Directional Mismatch

Underlying ExposureHedging

Hence the Objective of a Corporate Treasury

is to Get these 3 Basic Parameters Right

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7. Type of Forex Instruments

1. Forewards

2. Range-forwards

3. Puts

4. Strips

5. Swaps

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8.Three Aspects of FX Risk Management

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8A. Aligned Accounting Treatment – MTM Vs. Cashflow

Illustrative Case – MTM vs. Cash Flow Hedge

Cash-flow

Sept 15, 2009

Sept 30 Dec 31 March 31 June 30 Aug 15, 2010

Example: Hedge for Cash-flow from Collection of Debtors (DSO: 60 days)

Forward Rate of 48 for Aug 2010, taken a hedge of $1 Mn monthly Sales . Business has Operating margin of 15%

Aug 2010 Forward at

46.50

MTM Gain of

Rs. 1.5 Mn

Incr. MTM Gain of Rs.

3.5 Mn

Incr. MTM

Loss of Rs. 6 Mn

Cumulative MTM Gain Rs.

5 Mn

Cumulative MTM Loss Rs.

1 Mn

Cumulative MTM Loss Rs.

3 Mn

Incr. MTM

Gain of Rs. 3 Mn

Cumulative

MTM Rs. 0 Mn

MTM Gain of

Rs. 1.5 Mn

Aug 2010 Forward at

43.0

Aug 2010 Forward at

49.0

Aug 2010 Forward at

51.0

Incr. MTM

Loss of Rs. 2 Mn

Spot at

48.0

MTM

C/f Hedge Balance-sheet

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Economic Impact on Operating

Performance

Designated Hedge

F/C Cashflows

8B. Enabling Policy

F/C Capital Asset /Liability

Capital Hedge

F/C Monetary Asset

Hedge

Type of Exposures

Underlying Risks

Economic/Pure Accounting

Depending whether it will be ever paid/realized

Pure AccountingMTM Shock to Income Statement

Based on Period-End Exchange Rate

Type of Hedges

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8C. Robust Processes

•Defined Risk Mgmt Framework & Documentation flow

•Audit committee oversight of Treasury Policy

•Clear limits for quantum of hedges under each category

•Independent Back-office

•Confirmation & Settlement function under controllership

•Documentation for hedging signed-off jointly by Controller & Treasurer

•Audits at defined interval of policy & process adherence

•Robust system as backbone

•Daily and weekly MIS on positions through Independent Middle office

•Reporting to Business Mgmt and Audit committee

•Constant benchmarking for best practices and against changing business needs

Policy ControlIndependent

Controllership FnOptimal Information

Flow

Thank You