Tata Consultancy Services Limited · NSE:TCS
Tata Consultancy Services — Investor Presentation (July 2008)
17 slides from Tata Consultancy Services's investor presentation, Jul 22, 2008
Slide 1: Managing the Challenges of Volatile FX Markets within the Accounting Parlance
Managing the Challenges of Volatile FX Markets within the Accounting Parlance Treasury Perspective 22 July 2008 TCS Public
Slide 2: Why should we hedge?
Why should we hedge? • Business is exposed to several risks, currency risk being one of them • Objective of hedging is to ensure: – Predictability in Income Statement thereby reducing cash flow volatility. Revenue is generated & receivables are collected at budgeted rates – Maintaining margins on lo
Slide 3: Hedging Policy - Best Practices
Hedging Policy - Best Practices • A good risk management and hedging policy should be debated, understood & approved at the highest level (Board) • The policy should indentify risks entity is exposed to, ways to measure these risks & suggest methods to mitigate these risks • Should specify clear ide
Slide 4: TCS Policy
TCS Policy • Risk Management Policy approved by Board of Directors stating risks, means to mitigate these risks; defining authorities, responsibilities & controls and stating broad parameters within which treasury has to function. Policy reviewed by board periodically • Risk Management Board is resp
Slide 5: Types of Exposures
Types of Exposures Exposure Nature of Sources of Risk Risk Exposure 1>Receivables Current Risk Credit Period Exchange Risk on Collection 2>Current Revenue Current Risk Daily invoicing Missing Profit Targets 3>Future Revenue Future Risk Long Term Missing profitability with Contracts/Bids long term ex
Slide 6: Managing Current Risks
Managing Current Risks •All the current risks (Receivables, current revenue) & hedges against current risks (non-cash flow hedges) are marked to market every quarter end and booked in P&L based on matching concept. ILLUSTRATION CASE 1 CASE 2 Month 1 Billing done at 40.00 40.00 Hedged at 40.50 40.50
Slide 7: Managing Future Risks
Managing Future Risks • TCS on an ongoing basis negotiates long term contracts with clients. pricing of which is done with targeted profit margins at a given exchange rate • Predictability of exchange rates in such long term contracts is essential to meet the desired profit margin sharp exchange rat
Slide 8: Scenario Analysis
Scenario Analysis ILLUSTRATION •5 year contract of USD 100 mio @ 40.00 while bidding. Target profit margin of 30%, all expenses are in INR Revenue in INR 4000 Expense (say) (2800) Profit 1200 Target Profit Margin 30% Hedged @ 40 Un-hedged Maturity Rate 38 42 38 42 Revenue 3800 4200 3800 4200 Expense
Slide 9: FAS 133: Tool for Long Term Hedging
FAS 133: Tool for Long Term Hedging • FAS 133 & IAS 39 are globally accepted & progressive accounting standards • Majority of the Fortune 500 companies use these standards for forex accounting. Similar type of guidelines are proposed in Accounting Standard - 30 by ICAI • FAS differentiates between “
Slide 10: The Robust Accounting Standard
The Robust Accounting Standard • Once the hedge objective and relationship are defined, under no circumstance can the relationship be altered. The transfer of cash flow hedge to non-cash flow hedges and vice-versa is not allowed • Accordingly, all current risks and hedges to protect those risks shou
Slide 11: Hedging strategies
Hedging strategies Treasury Perspective 22 July 2008 TCS Public
Slide 12: Basic Hedging Instruments
Basic Hedging Instruments Instrument Advantage Disadvantage Forward Contracts •Full downside protection •No participation in case of •No cost upside Vanilla Options •Provides full upside as well •Initial Cost downside protection Range Forward •Complete downside protection •Upside participation up to
Slide 13: Options, a superior hedging tools in uncertain times ..
Options, a superior hedging tools in uncertain times .. • Plain Option is a right but not an obligation. It is a superior hedging tool that enables significant participation in case of INR depreciation at same time protecting the budget rate • FAS 133 clearly specifies hedge compliant structures. St
Slide 14: CASE STUDY
CASE STUDY Expected revenue of USD 100 mio for FY 09-10 at 40.0 Entity A lacks option expertise & hedges using forward contracts at 40.25 Entity B hedges through a mix of forwards and options as under: a) 25 % Forwards @ 40.25; b) 25% Plain Options @ 40; Cost 25 paise and c) 50% Range Forwards: Long
Slide 15: MTM vs HTM
MTM vs HTM • Marked to Market (M to M) is the current value of hedges & Hold to Maturity (H to M) implies the “actual” value of hedges on maturity date • FAS requires all Cash flow hedges (CFH) normally to be held to maturity. H to M is relevant measure of profitability & M to M is only interim noti
Slide 16: Currency Movement: Economic Impact
Currency Movement: Economic Impact • Budgeted Revenue: USD 1000 mio • Budget Rate 40.00 • Hedge Ratio 60% • Hedged at 40.00 • Upside Participation 41.00 Spot at 38 39 40 41 42 Impact on Revenue (2000) (1000) 0 1000 2000 Hedge Impact 1200 600 0 0 (600) Total Economic Impact (800) (400) 0 1000 1400 Al
Slide 17: Thank You
Thank You AU CMUSMWU CUCU AAU SOU CMU ZU CU SU PAU SAU SU PU SAU CU SU SAU UZ, PANVTYANYTY/NGHYNGTYANSTV/NGHVANGEVANGEPAANNEPAANVEPANVEP/\NEP/\NII/A\NRY/A\NRY/A\UEP/ANUEPANEPAANVEP/A\UEPANYIPAN TOTAAL ALATA TAL TAT ATA TATA VATA ATATATAUATE TATA CONSULTANCY SERVICES 22 July 2008 17
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