SNAFU

Situation Normal, All Fucked Up.
That's what describes the financial condition of significant number of large, well respected Indian companies. To me it seems as if some bad April Fool prank has been played on the investors. Derivative losses are burning holes in the books of companies. It wasn't unexpected yet the scale of damage from derivative and hedging losses has spooked investors.

TCS reports foreign exchange loss of 781.3 Cr. You won't find it mentioned in their press release. You will have to literally dissect the reported result to find it. An innocuous looking note says: "Other income (consolidated) for the year ended March 2009 includes foreign exchange loss of 78,136 lakhs."Ranbaxy reports a Rs 918.8 Cr loss, "arising on account of change in fair value of foreign currency options determined to be ineffective cash flow hedge". No, it's not all. Its result contains two more items: 'Foreign Exchange loss' of 56 Cr and 'Foreign Exchange Loss on Loans' of 124.2 Cr. A total of 1,098.4 Cr.

"While these three items were non-cash in nature, they primarily contributed to the overall loss of Rs. 9,146 Mn (USD 198 Mn) for the year"

Wockhardt, reports MTM losses of Rs 581 Cr. They do not take into account the already booked losses of Rs 489.5 Cr. Their press release says:

"Some of the banks, based on the early termination clause in the agreement had terminated certain forex contracts and claimed an amount of Rs. 4895.24 million. The Board is of the view (that) the forex transactions were unilaterally cancelled by the banks and the mark to market losses had arisen on account of counter positions advised by the banks. The Company has obtained a legal opinion that these contracts can be disputed, and accordingly no provision for the same has been made"

To put this not-so-grand total of 1,070 Cr losses in perspective, the company's consolidated networth in the year ended Dec 2007 was 1,065 Cr.

Habil Khorakiwala is unashamed. "We have had an exceptional year in all ways, both in terms of sales revenues and operating profits".

HCL Technologies reports forex losses of Rs 201.3 Cr for the third quarter. It reported forex losses of 300 Cr in March 2008, 141.9 Cr in Sept. 2008, 67 Crores in Dec 2008. Total losses in 4 quarters comes to 710.2 Cr.

"Our investments are not only delivering business results but with heightened employee engagement and a global recognition of HCL's 'Bold' business strategy, HCL is today geared to lead the industry well through this difficult time", said Shiv Nadar, Chairman and Chief Strategy Officer, HCL Technologies.

Haven't we had enough of 'boldness' already? How do these idiots claim to have delivered good business results when their networth is being wiped out through their outlandish bets on currency movements? How can they not admit that they did a foolish thing and they are paying up for it?

The companies I've mentioned aren't mom and pop businesses. They are among the top companies in their sectors. If investors get this performance from leading companies, what else can they expect from laggards?

I'm not only angry, I'm feeling sick. This is no way to run a business. Financing growth though optimal capital structures and managing risks is part and parcel of business. You cannot say we had an exceptional year in terms of revenues but the profitability was impacted due to non cash charge. MTM losses are a future cash charge. There is no currency god they can pray to. When these derivative positions are unwound (by the companies or by their banks, forcibly), these companies will have to pay a huge cost for their stupidity and pay though a bleeding nose.

This reminds me of the story of a bird which fell on the ground in a storm and lay there dying in the cold. A passing cow deposited a pile of dung on him. The warmth of dung brought a new lease of life in the bird and soon he started singing. A passing cat heard the song. He dragged the bird out of dung and ate him.

The story has 3 lessons.


  1. Not all shit is bad for you
  2. The one who takes you out of shit, is not necessarily being good to you
  3. When you are in deep shit, you should not sing songs about it.

Corporate India focused solely on lesson one from this story. They lapped up all kind of derivative while claiming 'We do not hold or issue derivative financial instruments for trading or speculative purposes. The company actively hedges it's foreign currency exposure as a part of its risk management policy'. It was bullshit but to them, the lesson number one overruled the objections.

It's imperative that they learn the other two as well. That is – beware of banks selling complex derivative products that you don't understand. The banks want their share of these exotic financial products. They will claim that 'exchange rate volatility will kill you. If rupee appreciates further, you would be in deep shit. Let us help you'. Remember lesson no 2.

Finally, when the mistake is made, own it, don't sing songs about performance at the operational level. When a company makes some money though other income, extraordinary profits, they include it in the full page adds in financial dailies screaming "Revenue up 27%, profits up 68%". Now everyone is talking about 'EBITDA', Profit before gain/loss due to exchange fluctuations'. You can't have it both ways. If you fucked up, say it. A person, who persistently tries to fool others, ends up fooling himself. The applies to organizations. It's time for corporate India to wake up and take corrective measures to get out of the mess they have gotten themselves in. No point suing banks for your own blunders. It's time to stop fooling investors otherwise the ire of investors will raze the billion dollar market capitalizations to ground zero much before you've had a chance to do any restructuring.

2 comments:

Anonymous said...

Your anger is justified, but than again a lot of this world functions on proper 'framing'. Till these companies 'Frame' their results in the manner they please, I don't think investor ire is going to be absolutely ruthless.

cooldude said...

I agree with you totally. Almost all companies in India care a fig for the small investor. Their websites carry 'ancient data'. Their response even to query from shareholders is often inadequate. Even the socalled savvy investors who have a large shareholding dont seem to put pressure on the promoters. For instance, Rakesh Jhunjhunwala has a large shareholding in Viceroy Hotels. The company's website says that their hotel in Chennai (having a tieup with Marriott) is due to open in April 2009. This was what was seen in the third week of April. The Marriott website says that the hotel will open in October 2010. Shouldn't the promoters be sued for misleading investors?

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