Investors punish L&T for subsidiary’s hedging loss

Investors punish L&T for subsidiary’s hedging loss
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First Published: Tue, Mar 11 2008. 06 48 AM IST

Updated: Thu, Mar 13 2008. 12 06 PM IST
Mumbai:Shares of engineering company Larsen and Toubro Ltd (L&T) plunged 12.48% on Monday, its steepest single-day fall in four years, after at least four brokerages published reports that its overseas arm, Larsen and Toubro International FZE, is expected to post commodity hedging losses this fiscal year.
A company official, who did not want to be named, said the UAE-based unit will incur a loss of Rs150-200 crore from its hedging activities in commodities, following decline in prices of certain commodities.
“Prices came down significantly, triggering stop-loss,” the executive said. The hedging was mainly in zinc and certain other metals.
“We have pared the exposure to hedging which was about 15% of the overseas company’s overall exposure to commodities,” Y.M. Deosthalee, chief financial officer of L&T, told Mint. He also said there will not be any change in the company’s outlook following this as the rising margin of L&T will offset this loss.
Larsen and Toubro International FZE, the investment arm of L&T, undertakes commodity derivative transactions to hedge commodity exposure of the group companies.
“It is pertinent to note that almost all the profits in this entity in the last two years are from gains in commodity hedging,” Venkatesh Balasubramaniam, an analyst with Citigroup, said in a 9 March research note.
According to Shailendra Kumar, head of research at Sharekhan Commodities Pvt. Ltd, many times companies trade beyond their hedging requirements, which is plain speculation. “Many other big firms, which hedge in commodities markets, may come out with similar losses soon,” Kumar said. He, however, did not name any company.
L&T stock closed at Rs2,728.80 on the Bombay Stock Exchange (BSE), down 8.68%, even as the Sensex, the benchmark index of BSE, recovered from its intra-day low of 15,362.17 to close at 15,923.72, losing just 0.32%. The L&T stock now is more than 40% down from the 52-week high of Rs4,670 it recorded on 1 November 2007.
Bharat Parekh, an analyst with international brokerage Merrill Lynch, cut his consolidated earnings estimate on L&T by 9-13% to factor in the hedging loss, likely losses in West Asian subsidiaries and higher-than-expected steel price hike recently.
“These losses, after a 3Q translation loss on yen loans of Rs50.5 crore, could also support de-rating of the stock, especially given the current market sentiments,” Parekh said in a note to clients.
“There is no change in our full-year outlook, we are still standing by it,” Deosthalee said. The company had earlier forecast an order book growth of 25-30% and a sales growth of 25-30% from the 2006-07 levels. The firm’s margins so far in 2007-08 stand at 12%, one percentage point above last year, this should compensate for the hedging losses, Deosthalee said.
“Our assessment of L&T guidance implies international subsidiaries have a net loss of about Rs36 crore. Marginal losses from these subsidiaries could be due to loss from L&T International FZE, which hedges forex and commodity exposures, of Rs50-70 crore, which has less than 3% impact on consolidated profits,” Manish Saxena, an analyst with international brokerage Deutsche Bank Securities Inc., said in a note to clients.
Satyam Agarwal of Motilal Oswal Securities Ltd expects the unit to report a net loss of Rs92.4 crore in fiscal 2008.
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First Published: Tue, Mar 11 2008. 06 48 AM IST