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Nov 10, 2017 12:46 PM IST | Source:

What happens when Rakesh Jhunjhunwala gets to quiz Tata Motors' top brass

JLR’s lower forex hedge loss, and lower other expenses, as well as operating leverage, drives EBITDA for Tata Motors.

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Ace investor Rakesh Jhunjhunwala on Thursday questioned the Tata Motors management on how they plan to hedge against foreign exchange fluctuation and mitigate the company's hedging losses.

The commercial and passenger vehicle maker reported a robust three-fold growth in profit for July-September quarter, thanks to strong performance by Jaguar Land Rover Automotive Plc (JLR).

The consolidated profit during the quarter increased to Rs 2,501.67 crore, from Rs 848.16 crore in same quarter last fiscal. Sales rose 10.34 percent to Rs 70,156 crore from Rs 63,577 crore a year ago.

JLR’s lower forex hedge loss and lower other expenses, as well as operating leverage, drove EBITDA for Tata Motors. The net sales at GBP 6.3 billion were largely in line with estimates, 11.5 percent higher YoY led by volume growth of 6.2 percent and realisation growth of 5 percent.

In the post-results investor concall organised by Tata Motors on Thursday, the Big Bull of Dalal Street asked JLR CEO Ralf Speth about the company's foreign exchange hedging strategy and about its possible outcome at the end of an year from now.

In the foreign exchange market, hedging takes place in currency forwards. Typically, companies like Tata Motors, which earn a part of their revenue in foreign currency due to significantly large foreign subsidiaries, hedge for longer periods of time than others.

Jhunjhunwala's logic was that considering that Tata Motors must have hedged heavily against a fall in the pound before Britain voted to exit the European Union last year, the company would still be holding forward positions from the time.

So the investor wanted to know what would happen if the rate at which the company hedged comes down and the pound's value goes up at the same time. "Does that mean that next year your hedged losses will be substantially lower?" he asked.

In response, Speth said that the company's total loss incurred on hedging stood at £1.09 billion, less than half the £2.34 billion at the same time last year. He also pointed out that the £1.09 billion was the loss the company was slated to run through over the next couple of years.

Speth cited two chief reasons for this halving of hedging loss. “One is because of the passage of time we have worked through this hedged position quarter by quarter and the other reason is that exchange rate has changed,” he said.

The JLR CEO added that the company had marked profit at an exchange rate of 1.34 pounds to the dollar, adding that of the total remainder, £793 million was expected to mature in a year's time at current exchange rates.

Jhunjhunwala wanted a confirmation from the management about whether a larger amount matured over the last one year, to which the management replied in the affirmative. The investor then asked that given interest rates remain the same, if next year's hedging loss number would be substantially lower than this year's. This query was also affirmed by the management.
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