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Lesson from MindTree’s forex losses

Lesson from MindTree’s forex losses
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First Published: Wed, Jul 16 2008. 10 57 PM IST
Updated: Wed, Jul 16 2008. 10 57 PM IST
The June quarter results of MindTree Ltd make an interesting point. The rupee may have depreciated sharply since end-April, but none of the gains from this will flow into the net results of information technology companies which were overtly aggressive with their forex hedges.
On 16 April, MindTree provided a revenue and profit growth guidance for the year to March 2009, based on a rupee-dollar rate of 39.4. The domestic currency has depreciated by nearly 9% since, but the company has maintained its guidance. This should normally have led to a sharp rise in the profit guidance, since operating profit margin inches up by roughly 50 basis points for every 1% depreciation in the rupee.
It turns out that MindTree had large hedges taken at a rate of 40.97 to a dollar, and has booked mark-to-market losses worth $12 million (Rs51.8 crore) on them in the June quarter. In one sense, the losses are notional, because the company hasn’t unwound the derivatives positions and hasn’t actually booked the losses.
But the right way to look at it is that a large chunk of the company’s foreign currency revenues and receivables this year will be converted into domestic currency at a rate of 40.97 to a dollar, and not at the ruling rate of 43.07. In other words, it will be a while before the benefits of the rupee depreciation flows to the bottom line of MindTree. A similar story will play out in some other IT firms with large hedge positions, although in varying degrees.
Write to us at marktomarket@livemint.com
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First Published: Wed, Jul 16 2008. 10 57 PM IST