Analysts estimate the cancellations of these hedges will result in a loss of Rs 400 crore to Rs 500 crore, which the company will have to show in its profit and loss statement when declaring its results over the next few quarters. Dividend payout could be affected, too, since the company's cash reserve would be affected.
Analysts said the $2 billion HCL Technologies was known for hedging heavily. The company had reported a forex loss of Rs 125.50 crore for the quarter ended March 31, 2009. The company has $1.08 billion worth of hedges on its books as on March 31, 2009.
"The loss on account of cancellations of these contracts would be Rs 520 crore at the current spot rate of Rs 49.69 versus the hedge rate of Rs 41. However, according to the management, the cancellation is likely to be spread out before the actual maturity," states an ICICI Securities report.
Asked about the development, a company spokesman confirmed that it had cancelled hedges for the next few quarters but declined to disclose the exact amount it cancelled. Anil Chanana, executive vice-president-finance, said, "In this quarter, we have cancelled some hedges that were to mature by December 2009. These were the same hedges that were taken in late 2007 and early 2008 before the global meltdown took place. But the forex losses are already reflected in the P&L account to the extent these are marked-to-market and the rest are reflected in the balance sheet. They will flow through the P&L over the next seven quarters, irrespective of the cancellation of these hedges."
Analysts said the company had factored in a loss of over Rs 1,000 crore for the forex hedges of $1 billion. "Cash losses will occur on the day of cancellation," added an analyst of a broking firm.
Analysts are divided over the company's decision to cancel its hedging positions. "It's a one-time act that the company is taking to clean up the balance sheet. After this, the numbers can focus on its operations rather than get impacted by currency fluctuations. Of course, this will impact the company's surplus cash reserve as well, as in the next few quarters the dividend payout might get negatively impacted," said an analyst.
HCL Technologies, according to the ICICI Securities report, will debit the loss on the likely cancellation of contracts in respective quarters of maturity versus the earlier policy of booking losses in the quarter of cancellation ($31 million loss on cancellation of $540 million hedges in Q4FY08). "We believe the new policy is fair and in accordance with the US GAAP, and reduces earnings volatility," the report adds.
The cash outflow related to cancellation will also be accounted for in respective quarters of maturity as per the contract clause with the bank.