Hedging currency risk at tt textiles composition
It was a hot 03 morning in Kolkata in the year 2009. Sanjay K. Jain, —Joint Taking care of Director of TT Fabrics, watched the daylight stream in through his office windowpane. But his mind was elsewhere, checking the moves of the Swiss franc (CHF) in the last couple of months and the globe events that had brought on them. The Swiss franc had handled 1 . seventeen CHF/US$ from your previous year’s record of 0. 96CHF/US$. That was good news for him. Or was it? The irony in the situation was not lost upon him.
When, the Switzerland had franc barely discovered among all different currencies that vied intended for his attention in the typical course of items. Yet, recently, it was the movement from the CHF that weighed in the mind many heavily.
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As an exporter to more than 30 countries, TT Textiles was no fledgeling to the part of currency risk. TT Textiles usually employed forwards to control currency dangers. However , during 2006-07, if the INR was expected to appreciate to an unmatched high of thirty five INR/US$, the organization had created a change deal depending on the historic stability of the CHF against the US$.
At the time, the offer had looked relatively safe and very profitable. However , when the global financial crisis struck in 08, it began to sizeable mark-to-market losses. Luckily it overturn in 2009 and was no much longer in the red. Good results . three months left on the contract, the big problem Jain confronted was if to quit today or maintain it until maturity.
The textile and garments industry in India got traditionally been an export-oriented industry. In 2008, that contributed several per cent for the overall GROSS DOMESTIC PRODUCT of India and accounted for 14 percent of the professional production and 14 % of total exports of goods. More importantly, India earned about 27 % of the total forex through textile exports. It absolutely was also the other largest workplace after culture, providing immediate employment to 35 , 000, 000 people and indirect career to forty five million persons. In 2008-09, the total product sales generated by textile and clothing sector amounted to US$33. 4 billion in the domestic industry and US$21. 6 billion from exports.
Mentor Rajesh Chakrabarti prepared the case solely as being a basis for class discussion. This case is not intended to function as an certification, a method to obtain primary info, or a great illustration of effective or ineffective supervision. The author thanks a lot Shashvat Reflet and Anurag Sharma via ISB’s PGP Class of 2011 for assisting in the writing with this case. This situatio was developed beneath the aegis with the Centre intended for Teaching, Learning, and Case Development, ISB. Copyright @ 2013 Indian College of Business. The distribution may not be digitised, photocopied, or otherwise reproduced, placed or transmitted, without the agreement of the Of india School of Business.
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As a adult industry, the textile sector was noticeable by fairly low margins varying from 3 per cent to 12 percent depending on exactly where in the worth chain a specific company controlled.
The total industry for materials and clothing was likely to reach US$100 billion by simply 2015, with 43 percent of revenues coming from export products. Specifically, fabric exports had been expected to yield US$22 billion and the domestic textile marketplace was supposed to yield US$28 billion simply by 2015. two
The US buck was the prominent currency to get pricing textile products globally, in a significant measure possibly for exports to European countries or Latin American countries.
TT Textiles Limited, the range topping company of the TT Group, was founded in 1978 by the family of Dr . Rikhab Chand Jain. It was India’s first knitwear company to look public. TT Textiles was a vertically integrated textile company with a occurrence in the entire cotton string, from dietary fibre to yarn to knitted fabric and garments. It had manufacturing facilities out of all major dress centers Tirupur, Kolkata, Delhi, Varanasi, Saharanpur and Kanpur. It had ginning units in Gondal, Gujarat and branches for silk cotton in Jalna, Maharashtra. The company’s core businesses were agrocommodity, cotton, wool, fabric and garments, and its particular markets had been spread all over the world, as displayed below (also see Show 1):
Sanjay Jain, an MASTER OF BUSINESS ADMINISTATION gold medalist from IIM, Ahmedabad and an Associate Member of the Company of Organization Secretaries of India (ACS) and Start of Cost Accountants of India (AICWA), began his career by ICICI Bank before starting his own securities firm, which he later marketed. He joined TT Materials in 2001 and was instrumental in expanding the textile organization and establishing the advertising network pertaining to raw silk cotton yarn in over 20 countries around the world. About 75 percent of TT Textiles’ earnings came from exports, and at any kind of particular stage of time, the corporation had an exposure of approximately US$25 , 000, 000. The life of a typical export deal in the industry particularly of the kind that TT was party to was less than three months. TT Textiles loved a margin of five to six % in its business.
Currency derivative items were relatively new entrants in India. The majority of Indian businesses depended on their banks to hedge currency exposures. Within a 2009 newspaper article, Ramesh Kumar, Senior Vice President and Head, Personal debt and Foreign currency markets of Asit C. Mehta, explained:
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In the past, in a controlled environment, India Inc. counted on banks for covering up its foreign currency requirements. … Some of the businesses trade actively in forex and have a different treasury supervision unit for foreign exchange ventures. However , additionally, there are large numbers of small , and medium companies which participate in the currency market passively and depend on industrial banks (authorised dealers) for requirement of forex and protection of money 3
The currency market was one of India’s biggest financial markets, with proceeds on the spot and forward marketplaces together containing around US$12 billion each day in 04 2007. As September 08, there had been both forex trading (forex) forwards as well as futures markets in the area trading the INR-US$. Derivatives on other currencies were not traded. The rupee-dollar ahead market was an otc (OTC) marketplace, the trades on which had been settled throughout the Clearing Firm of India Ltd (CCIL), which was the clearing home for fx and rate of interest trades in India. This minimized the credit risk associated with these agreements inside the Indian industry.
According to Chakrabarti and De, “In 2006-07, eighty five, 106 fx forward transactions went to CCIL for negotiation, with a notional value of US$342 billion. By late 2006, frontward market turnover was nudging US$2 billion dollars a day. International institutional buyers were able to carry out transactions on the currency derivatives market that might be characterized as ‘hedging’ with the currency risk exposure prove Indian expenditure. “
Besides the domestic rupee-dollar forward industry, there was energetic trading for cash-settled rupee-dollar forwards in Hong Kong, Singapore, Dubai and London on what had been termed “nondeliverable forwards” (NDF) markets. Intended for foreign institutional investors who had limited use of the forwards markets around the domestic INR-US$ markets, the NDF marketplace did not endure the limitations imposed simply by capital settings. However , to get domestic traders, this generated limited involvement by banking institutions of the onshore currency forwards market.