Wockhardt Ltd, India’s fifth largest drug maker by revenue, has taken a significant hit from exposure to complex cross-currency options and structured products, say several bankers and risk management experts.
These people, none of whom wanted to be identified, said the drug maker’s paper losses, because of the dollar’s continued weakness against global currencies, are “substantial” and could result in Wockhardt swinging to a loss when it reports first quarter results, especially if the greenback continues to be weak.
Despite repeated attempts all week by Mint to obtain a response, a Wockhardt spokesperson declined to comment. A detailed questionnaire listing what these unnamed bankers and risk management experts were saying about the company’s potential losses, remained unanswered since Monday, when it was sent to Wockhardt.
The bankers who spoke to Mint didn’t specify a loss amount other than saying it was “substantial”.
Indian accounting rules are not very clear on whether firms need to book these notional losses, known as mark-to-market (MTM) losses. The Accounting Standard (AS) 30, which deals with a firm’s MTM losses from the derivatives business, will only come into effect from 2011, but some of the experts whom Mint spoke to said if the losses are on account of speculation and not genuine hedging, a company would need to book them.
According to the same bankers, Wockhardt has been in the derivatives market for the past few years and has a dedicated risk management team.
Mint had reported on 7 March that several Indian companies that have incurred similar losses in the derivatives market, are exploring legal options against their banks. It is unclear whether Wockhardt has considered any such legal moves, especially given the firm has an internal risk management team that would have weighed in before such transactions were entered into, said one foreign exchange consultant familiar with the matter.
Wockhardt gets some 60% of its revenues from overseas markets. It posted a net profit of Rs213.9 crore in 2007 in a year when its “other income”, which includes income from treasury operations, dropped by around half to Rs11 crore compared with 2006.
Wockhardt had Rs513.62 crore worth of deposits, including unused funds of Rs421.47 crore raised through foreign currency convertible bonds (FCCBs), with banks in December 2006, the last period for which such data is available.
The company had raised around $110 million (Rs445.5 crore) through such bonds in 2004 for overseas acquisitions.
While it has a growing presence in overseas markets, especially in Europe, Wockhardt had raised FCCB for potentially funding acquisitions in the US. According to the same bankers, a significant portion of this fund has possibly been used to buy structured derivatives products.
Wockhardt’s 2006 annual report notes that the company has derivative instruments and unhedged foreign currency exposure, not unusual for many companies that do the same. It says: “The company enters into forward exchange contracts being derivative instruments, which are not intended for trading, or speculative purposes, but for hedge purposes, to establish the amount of reporting currency required or available at the settlement date of certain payables and receivables.”
In December 2006, Wockhardt had two contracts on outstanding currency swaps, in addition to forward exchange contracts, to hedge against fluctuations in changes in exchange rate and interest rate changes, one with a notional principal of 4,158million yen (Rs166.32 crore then) and the other with a notional principal of Rs154.87 crore.
During 2006, Wockhardt had foreign currency exposure to the tune of Rs1,367 crore, which had not been hedged.
Wockhardt’s shares fell 4.8% to Rs260.55 a share on the National Stock Exchange on Wednesday. It is trading 42.28% below its 52-week high of Rs450.05 a share.