Mahindra’s aggressive hedging policy backfires

Mahindra’s aggressive hedging policy backfires
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First Published: Sun, Feb 01 2009. 09 24 PM IST

Updated: Sun, Feb 01 2009. 09 24 PM IST
At first glance, the December quarter results of Mahindra and Mahindra Ltd seemed disastrous, with the company slipping into a loss at the Ebit (earnings before interest and tax) level. But this was mainly because operating expenses included a loss on account of forex fluctuations worth Rs182 crore. Adjusted for this, Ebit stood at Rs155 crore, 42% lower than the profit reported in the year-ago quarter.
The drop in profit was owing to a 15% fall in revenue to Rs2,520 crore and a decline in the Ebit margin, which fell by nearly 300 basis points because of higher raw material costs and a drop in volumes. One basis point is one-hundredth of a percentage point.
While the forex loss can be treated as an exceptional item, it’s important to note that nearly three-fourths of the loss, or Rs136.5 crore, wasn’t a notional or mark-to-market loss but an actual cash loss borne by the company when it cancelled forward contracts in the currency derivatives market. This amounts to about 75% of the pre-tax profit the company generated last quarter, and is a case of an aggressive hedging policy backfiring.
It remains to be seen if losses from further cancellations of forward contracts continue in ensuing quarters. But as far as the core automobile and farm equipment operations go, things are likely to get better thanks to the fall in commodity prices.
Mahindra and Mahindra is also relatively better placed than other auto manufacturers, thanks to its high exposure to the rural sector, both in the farm equipment segment as well as utility vehicles. Demand from this segment is not expected to be as badly hit because of the economic slowdown, unless of course this year’s monsoon is poor.
Having said that, poor availability of vehicle finance continues to be a concern and so the company is not expected to perform far better than the overall industry. These concerns are reflected in the company’s shares, which have corrected by about 65% from last year’s highs.
Write to us at marktomarket@livemint.com
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First Published: Sun, Feb 01 2009. 09 24 PM IST