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)