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MMTC Ltd. Analysis of Foreign Currency fluctuations
and the hedging strategies
Partha Chandra (32B)
Prachi Mukhija (33B)
Prapunj Mishra (34B)
Priya Juneja (35B)
Puneet Garg (36B)
Radhika Mediratta (37B)
Rajesh Jaddu (38B)
INDEX
1. INTRODUCTION
…………………………………………………………………………………….. 3
2. 2010-2011 ANALYSIS
…………………………………………………………………………………….. 5
3. 2009-2010 ANALYSIS
…………………………………………………………………………………….. 8
4. 2008-2009 ANALYSIS
…………………………………………………………………………………….. 9
5. 2007-2008 ANALYSIS
…………………………………………………………………………………….. 10
6. 2006-2007 ANALYSIS
…………………………………………………………………………………….. 12
INTRODUCTION
Established in 1963, MMTC, one of the two highest foreign exchange earners for India, is a leading
international trading company with a turnover of around US$ 10 billion.
It is the largest international trading company of India and the first Public Sector Enterprise to be accorded
the status of "FIVE STAR EXPORT HOUSE" by Govt of India for long standing contribution to exports.
MMTC is the largest non-oil importer in India.
MMTC's diverse trade activities encompass Third Country Trade, Joint Ventures, and Link Deals - all modern
day tools of international trading.
Its vast international trade network, which includes a wholly owned international subsidiary in Singapore,
spans almost in all countries in Asia, Europe, Africa, Oceania and Americas, giving MMTC global market
coverage.
MINERALS
MMTC is major global player in the minerals trade and is the single largest exporter of minerals from India.
With its comprehensive infrastructural expertise to handle minerals, the company provides full logistic
support from procurement, quality control to guaranteed timely deliveries of minerals from different ports,
through a wide network of regional and port offices in India, as well as international subsidiary.
MMTC has won the top export award from Chemicals and Allied Products Export Promotion Council
(CAPEXIL) as the largest exporter of minerals from India for twentieth year in a row.
FERTILIZERS
As a leading player in fertilizers and fertilizer raw material, MMTC has become a major fertilizer marketing
company in India, through planned forward integration of its import activities with the direct marketing of
Urea, DAP, MOP, Sulphur, Rock Phosphate, SSP and other farming and agricultural inputs.
BULLION TRADER
MMTC is the largest importer of gold and silver in the Indian sub continent, handling about 146 MT of gold
and 1250 MT of silver during 2008-09. MMTC supplies gold on loan and outright basis basis to the
exporter, bullion dealers and jewellery manufacturers on all India basis. MMTC has retail jewellery & its
own branded Sterling Silverware (Sanchi) showrooms in all the major metro cities of India. MMTC also
supplies branded hallmarked gold and studded jewellery. Assay and hallmarking units have been set up at
New Delhi, Ahmedabad & Kolkata for testing the purity of gold and gold articles duly accredited with
Bureau of Indian Standards.
Besides organizing major jewellery exhibitions in India & abroad, MMTC also has a medallion
manufacturing unit for minting of Gold/Silver medallions. MMTC has its online retail website
NON FERROUS METALS AND INDUSTRIAL RAW MATERIAL
MMTC is India's largest seller of imported non-ferrous metals viz. copper, aluminium, zinc, lead, tin and
nickel. It also sells imported minor metals like magnesium, antimony, silicon and mercury, as also
industrial raw materials like asbestos and also steel and its products. MMTC imports quality products
conforming to international specifications like ASTM or BSS or LME approved brands.
Major institutional customers of MMTC in India are accredited with ISO-9002 status. MMTC sources its
metals from empanelled suppliers including producers and traders throughout the world.
MMTC is a proud winner of gold trophy for exports of Engineering and Metallurgical product in non-SSI
Sector and also awarded the All India Trophy for highest export in the category of prime metal by EEPC.
AGRO PRODUCTS
MMTC is amongst the leading Indian exporters and importers of agro products. The company's bulk exports
include commodities such as rice, wheat, wheat flour, soya meal, pulses, sugar, processed foods and
plantation products like tea, coffee, jute etc.
MMTC also undertakes extensive operations in oilseed extraction, from the procurement of seeds to the
production of de-oiled cakes for export, as well as the production of edible oil for domestic consumption. It
also imports edible oils. MMTC has won the gold trophy from FIEO for highest exports in agriculture &
plantation product in non-SSI Sector.
GENERAL TRADING
MMTC also handles items like textiles, Mulberry raw silk, building materials, marine products, chemicals,
drugs and pharmaceuticals, processed foods, hydro carbons, coal and coke.
Information on above can be supplied on request. MMTC also exports engineering products.
Premiums paid on Forward Contracts
2010-2011 2009-2010 2008-2009 2007-2008
Premium on Forward Contract 191.82 152.63 186.55 107.07
The premiums paid on forward contracts increased from 107.7 in 2007-2008 to 191.82 Million in 2010-
2011. This can be mapped to the rise in Trade between these years.
0.0
100000.0
200000.0
300000.0
400000.0
500000.0
600000.0
700000.0
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Exports
Imports
FY 2010-11
FOREIGN CURRENCY TRANSACTIONS – ACCOUNTING POLICY
Transactions with rupee payment countries in respect of non-convertible Indian currency are being
treated as foreign exchange transactions.
Foreign currency monetary items (except overdue recoverable where reliability is uncertain)
are converted using the closing rate as defined in the AS-11 issued by the Institute of
Chartered Accountants of India. Non-monetary items are reported using the exchange rate at
the date of the transaction. The exchange difference gain/loss is recognized in the Profit and
Loss account.
Liability in foreign currency relating to acquisition of fixed assets is converted using the
closing rate as defined in AS 11 issued by the Institute of Chartered Accountants of India.
The difference in exchange is recognized in the Profit & Loss Account.
In respect of forward exchange contracts against existing underlying transactions, the premium /
discount is recognized proportionately over the life of the contract. The loss/gain due to difference
in exchange rate between (i) closing rate or the rate on the date of settlement if the transaction is
settled during the year, and (ii) the exchange rate at later of the date of the inception of the forward
contract or the last reporting date is recognised in the Profit & Loss Account for the year.
In respect of forward contracts relating to firm commitments and highly probable forecast
transactions, loss due to exchange difference is recognized in the Profit & Loss Account in the
reporting period in which the exchange rate changes. Any profit or loss arising on renewal or
cancellation of such contracts is recognized as income or expense for the period.
Investments in subsidiary company outside India are translated at the rate of exchange
prevailing on the date of acquisition
Currency translation
Transactions denominated in a currency other than United States Dollar (“foreign currency”) are translated
into United States Dollar using the exchange rates prevailing at the dates of the transactions. Currency
translation differences resulting from the settlement of such transactions and from the translation at the
closing rates at the balance sheet date of monetary assets and liabilities denominated in foreign
currencies are recognised in profit or loss.
CHANGES IN PROFITABILITY DUE TO EXPOSURE TO FOREIGN CURRENCY
Gain due to exchange rate
An amount of Rs. 228.54 million ( L.Y. Rs. 241.80 million) towards difference in exchange ( gain) has
been shown under cost of sales which has arisen mainly due to adoption of notional exchange rate
applicable on the date of bills of lading for initial recognition in reporting currency in respect of
import purchases / export sales denominated in foreign currency.
Loss on derivative contracts
The company accounted for a loss of Rs. 1,108,041 on derivative contracts for FY 2011.
Cash and bank deposits
United States Dollar $ 17,892,124
Singapore Dollar $ 77,559
In current account in Foreign currency $ 0.27 mn [Schedule 8 Annual Report 2010 11]
Forward Contract premium
The company paid a forward contract premium of $ 191.82 mn
The proportionate forward premium of Rs. 724.65 million (LY 226.26 million) for imports and Nil million
(L.Y. Nil million) for exports is to be recognized in the Profit & Loss Account of the subsequent accounting
year in terms of the provisions of Accounting Standard – 11 issued by the Institute of Chartered
Accountant of India.
In respect of forward exchange contracts outstanding as on 31.3.11 relating to firm commitments
and highly probable forecast transactions, the loss of Nil million (P.Y. loss of Rs. 0.75 million) has
been recognized in the Profit & Loss account on the basis of changes in exchange rate as at the close
of the year.
FINANCIAL RISK MANAGEMENT
Financial risk factors
The Company’s activities expose it to market risk (including currency risk, interest rate risk and price risk),
credit risk and liquidity risk. The Company’s overall risk management programme focuses on the
unpredictability of financial markets and seeks to minimise potential adverse effects on the financial
performance of the Company.
Risk management is carried out under policies approved by the Board of Directors. The Board of Directors
and the holding corporation provide guidelines for overall risk management, as well as policies covering
these specific areas.
1. Market risk
Foreign currency exchange rate risk
The Company’s business operations are not exposed to significant foreign currency risks, as it has no
significant transactions denominated in foreign currencies.
Interest rate risk
Interest rate risk arises primarily with respect to short-terms borrowings under import and export
financing. The Company monitors market interest rates closely to ensure that favourable interest rates
are secured. At balance sheet date, the Company has minimal exposure to interest rate risk.
Price risk
The Company has insignificant exposure to commodities price risk as it does not hold significant
commodities financial instruments.
2. Credit risk
Bank deposits that are neither past due nor impaired are mainly deposits with banks with high credit
ratings as determined by international credit rating agencies. The Company has no significant
concentration of credit risk except for amount due from holding corporation which has a good
collection track record with the Company. The Company has policies in place to ensure that sales of
goods are made to customers with adequate financial standing and an appropriate credit history. At
balance sheet date, there is no class of financial assets that is past due or impaired.
3. Liquidity risk
The Company manages liquidity risk by maintaining cash and available funding through an adequate
amount of committed credit facilities sufficient to enable it to meet its operational requirements. The
Company’s major classes of financial liabilities are trade and other payables and borrowings and their
contractual maturities are less than one year.
4. Capital risk
The Company’s objectives when managing capital are to ensure that the company is adequately
capitalised and to maintain an optimal capital structure by issuing or redeeming additional equity and
debt instruments when necessary. The Company monitors capital on the basis of the total
shareholder’s equity as shown on the balance sheet. The Company is not subject to any externally
imposed capital requirements for the financial years ended 31 March 2011 and 2010.
FY 2009-2010
The Foreign Exchange flow of MMTC is as following:
Earnings Outgo
Rs. In Million Rs. In Million
Exports 32247.14 Imports 405703.64
Others 226.15 Interests 362.63
Others 877.03
Total 32473.29 Total 406943.30
The proportionate forward premium of Rs. 226.26 million (LY Rs. 182.46 million) for imports and
Rs. Nil million (L.Y . Rs. Nil million ) for exports to be recognized in the Profit & Loss Account
of the subsequent accounting year in terms of the provisions of Accounting Standard – 11
issued by the Institute of Chartered Accountant of India.
In respect of forward exchange contracts outstanding as on 31.3.10 relating to firm
commitments and highly probable forecast transactions, the loss of Rs. 0.75 million (P .Y . loss
of Rs. Nil million) has been recognized in the Profit & Loss Account on the basis of changes in
exchange rate as at the close of the year .
In the cash flow statement, the foreign exchange loss is Rs. 324.48 million. Also, the net currency
translation loss is $ 11,266.
The company claims that the Company’s business operations are not exposed to significant
foreign currency risks, as it has no significant transactions denominated in foreign currencies.
MMTC raised unsecured loans from foreign banks to the tune of Rs. 5,504.36 million
FY 2008-2009
Earnings Outgo
Rs. In Million Rs. In Million
Exports 45788.40 Imports 306271.95
Others 159.66 Interests 1007.16
Others 2132.58
Total 45948.06 Total 309411.69
a) Cash, Stamps & Cheques in Hand 152.49 713.10
b) Bank Balances in India
in Current Account 375.32 2012.10
in Cash Credit Account (Debit Balance) 426.95 951.68
in Current Account in Foreign Currency 0.30 0.87
in Term Deposits ( including under lien/ lodged as security) 57624.99 55842.69
c) Bank Balances outside India
in Current Account 54.47 10.40
in Term Deposits 890.70 689.72
59525.22 60220.56
d) Share of interest in Joint Ventures 121.89 9 2.38
Total 59647.11 60222.94
1. The proportionate forward premium of Rs.182.46 million (LY Rs. 107.07 million) for imports and Rs.
Nil million (L.Y. Rs. Nil million ) for exports to be recognized in the Profit & Loss Account of the
subsequent accounting year in terms of the provisions of Accounting Standard - 11 issued by the
Institute of Chartered Accountant of India.
2. In respect of forward exchange contracts outstanding as on 31.3.09 relating to firm commitments and
highly probable forecast transactions, the loss of Rs. Nil million (L.Y. loss of Rs. 36.11 million) has
been recognized in the Profit & Loss Account on the basis of changes in exchange rate at the close of
the year.
3. Adhoc liability of Rs.66.21 million (L.Y.Rs. 121.80 million) has been made during the year towards pay
revision of the employees of staff cadre which has become due w.e.f. 01.01.2007 having regard to the
wage revision of officers already effected as per DPE guidelines. Further a liability of Rs 59.81 million
towards perquisite & allowance from 26.11.08 to 31.03.09 and Rs 50.00 million towards
superannuation benefit w.e.f. 1.1.07 has been made during the year as per DPE guidelines for wage
revision.
4. In the cash flow statement, the foreign exchange Gain is Rs. 234.84 million. Also, the net currency
translation loss is $ 11,266.
FY 2007-2008
Effect of exchange rate fluctuations on profitability
The analysis starts with the way the stock performed on the BSE and the $/Rupee exchange rate.
The firm started April 2007 with the stock hovering around Rs.112 and exchange rate falling. This was
after an interim dividend payout of 25%. But, the volume to this friendly event went unheard and the
prices fell throughout April into July. It was at the AGM in September when they announced to give
25% dividend payout and this was when the exchange rate had fallen quite a bit, the wheat imports
had grown and fresh tenders were called for wheat imports by MMTC Ltd. Associated with the fact was
the continuous volume pumping by the investors in the stock which saw the stock prices moving from
Rs.274 on 6 September 2007 to 1126 on 17 October 2007 to Rs.2124 on 2 November 2007. This
continuous rally was sharp. But, a flattened Dollar/Rupee rate through December and a sharp
depreciation in January into March led to the price of the share at Rs.1078 on 03 March 2008. So, the
period saw a sharp rise and a sharp decline of the share price. Dividend was declared as a mark of
company’s profit making, but what they weren’t able to enthuse in March, they were able to flux in
September.
In terms of profitability and company financials:
Profit after tax (PAT) touched Rs.2005 million, a 58% increase
Exports grew 15% to Rs.39114 million
Imports grew 9% to Rs.204499 million
Reserves and surplus 15% to Rs.9800
Lost Rs.26.91 million due to adverse foreign exchange movement in operating activities
37.5 38
38.5 39
39.5 40
40.5 41
41.5 42
42.5 $
/R
up
ee
Month
Exchange Rate Apr '07 - Mar '08
The exchange rate movement, also, caused a lot of income as well as outgo of exports and imports
earnings.
Forex tools used
MMTC used forward contracts as a hedging tool in the financial year 2007-08. In respect of forward
exchange contracts outstanding as on 31.3.08 relating to firm commitments and highly probable
forecast transactions, the loss of Rs.36.11 million has been recognized in the Profit & Loss Account
on the basis of changes in exchange rate at the close of the year.
Foreign currency loan portfolio
The foreign currency loan for financial year 2007-08 was made by MMTC Ltd’s subsidiary MMTC
Transnational Pte. Ltd. and was to the tune of $499472. The carrying amounts of the borrowings are
denominated in United States Dollar and approximate their fair values. The borrowings have an
average maturity of 14 days from the balance sheet date. The weighted average effective interest rate
of the borrowings at the balance sheet date is 3.48% per annum.
FY 2006-2007
Introduction
The year 2006-07 was a watershed year in the sense that MMTC has surpassed all its previous
benchmarks of performance and in the process raising the bar to greater heights of achievements.
During 2006-07 MMTC – the largest trading company in India - exhibited outstanding performance by
achieving its Highest ever business turnover of Rs. 233016.23 million during 2006-07 registering a
growth of 42% over the previous year. This ever -best business turnover since MMTC's inception in
1963 includes Exports of Rs. 34131 million and imports of Rs. 186074 million -- both the highest ever
performance in last 44 years. The other trade related earnings contributed Rs. 445.13 million. The
net profit earned by your Company recorded a growth of 17% over previous year and is the highest
profit earned by the Company since inception.
Financial Overview
Foreign Exchange Earnings and Outgo
Finance, Liquidity & Risk Management
The company has been following prudent fund management strategies. To provide for the liquidity
risks that may arise due to non-budgetary outflows or due to unanticipated delays in realization,
adequate credit lines are maintained for short-term funding of trade transactions, which do not bear
any commitment charges towards unutilized limits. MMTC continues to be a zero long-term debt
company.
The currency transaction/ swap rates are being continuously monitored and exposures hedged, as and
when necessitated, against the possible adverse movements. The International
markets/suppliers are tapped from time to time to avail cheaper sources of funds as also interest rate
arbitrage. MMTC also takes requisite insurance covers at competitive terms/rates to hedge the risks
associated with international trading operations.
The legal cell of the company ensures compliance of diverse statues and takes legitimate remedies to
recover dues from defaulting associates besides defending the company against various claims. The
"Disputes Settlement Committee" which has been in operation for amicable resolution of disputes
with business associates, in its 10 meetings held during 2006-07 settled seven cases involving an
amount of Rs. 41.4 million.
Reaching out to the customer
To facilitate promotion of two-way trade, MMTC is progressing satisfactorily on setting up of free trade
and warehousing zones (FTWZ) at certain identified locations in India. These zones would be on lines
similar to Special Economic Zones with the essential difference that, apart from being deemed foreign
territory, they would provide state of the art, world class storage facilities of different types to cater to
varied types of goods and users. As part of the FTWZ initiative, in order to provide non-ferrous metals
supplies at the customers’ doorstep, it is proposed to open an LME (London Metal Exchange)
warehouse in India. Currently Indian customers have to source their requirements from LME
warehouses at Singapore, Rotterdam and Dubai, leading to higher inventory carrying costs and longer
delivery lead-time.
Accounting policies followed in Foreign Currency Transactions
a) Transactions with rupee payment countries in respect of non-convertible Indian currency are being
treated as foreign exchange transactions.
b) Foreign currency monetary items (except overdue debts or where reliaibility is uncertain) are
converted using the closing rate as defined in the AS-11 issued by the Institute of Chartered
Accountants of India. Non-monetary items reported using the exchange rate at the date of the
transaction. The exchange difference gain/loss is recognized in the profit and loss account.
c) Liability in foreign currency relating to acquisition of fixed assets is converted using the closing rate
as defined in AS-11 issued by The Institute of Chartered Accountants of India. The difference in
exchange is adjusted in the cost of the assets.
d) In respect of forward exchange contracts, the difference between the forward rate and the
exchange rate at the date of inception of the forward contract are recognized as income or expense
over the life of the contract.
e) Investments in subsidiary company outside India are translated at the rate of exchange prevailing
on the date of acquisition.
Financial risk management
The Company’s activities expose it to a variety of financial risk, including the effects of changes in
foreign currencies exchange rates. The Company’s overall risk management programme focuses on
the unpredictability of financial markets and seeks to minimise potential adverse effects on the
financial performance of the Company.
Risk management is carried out under policies approved by the Board of Directors. The Board of
Directors and the holding corporation provide guidelines for overall risk management, as well as
policies covering these specific areas.
(i) Foreign currency exchange rate risk
The Company does not have significant exposure to foreign currency exchange rate risk as it transacts
mainly in US Dollars, which is its functional currency.
(ii) Interest rate risk
Interest rate risk arises primarily with respect to short-terms borrowings under import and export
financing. The Company monitors market interest rates closely to ensure that favourable interest
rates are secured.
(iii) Credit risk
The Company has no significant concentration of credit risk. The Company has policies in place to
ensure that sales of goods are made to customers with adequate financial standing and an
appropriate credit history.
(iv) Liquidity risk
The Company maintains sufficient liquidity and has committed credit facilities available from banks to
make available adequate funding for Company’s operating requirements.
Consolidated Financial Statements (w.r.t Foreign Currency Impact)