Agriculture and Allied Industry - Cost effective funding structure

• XYZ is an Agro Commodity exporter with a portfolio of $135 million.
• XYZ hedged its foreign currency risk by booking forward contracts. It availed bill discounting facilities and pre-shipment credit in foreign currency.
• The banking transactions were carried out with PSBs and Indian Private Banks.
• It is also a beneficiary of the interest equalisation scheme, thus eligible for then 3% and now revised 5% interest rate subsidy.

Challenge and Observation

Minimal Support from XYZ’s team: XYZ had minimal expectations from our team and provided us with bare necessary documents which limited our scope of scrutiny.

Observation: IFA Global observed that there was potential for signicant savings by improving the hedging strategy and by optimizing the financing availed by the company.

Process

• A thorough assessment of XYZ’s hedging mechanism was conducted by back testing the existing policies.
• IFA analysed the manner in which forward contracts were being booked, the rate of interest applicable in case of foreign currency versus INR funding, interest subvention benefits, etc.
• The assessment was conducted by scrutinizing the funding costs, incurred for the past 5 years, under different financing & hedging structures.
• The analysis focused around providing the most cost-efficient hedging and financing structure to XYZ.
• IFA advised XYZ to change the funding mechanism currently adopted and suggested a different hedge structure.

Outcome

By following IFA Global’s recommendations , A Ltd.:

• The assessment brought to light a significantly beneficial funding structure that was eventually adopted by XYZ.
• Our back testing analysis showed that annual savings of around 2-3% in interest cost would have accrued by XYZ by adopting our optimal structure in the past.
• After having implemented our suggestions, XYZ trimmed its interest cost significantly. Since it is a growing company, XYZ requires funding to venture into new geographies. Thus, the mechanism IFA helped implement yields benefits to the company till date.