Logistics Companies - How does FX hedging impact your profitability

• A logistics company (A Ltd) with an annual turnover of USD 24 million in exports and USD 13 million in FX remittance.
• The company used to do the natural hedging of USD 13 million without using any proper risk management and hedging strategy and keep net USD 11 million unhedged.

Challenge and Observation 

• There was no Risk Management Policy in place and hence clarity on FX P&L was missing.
• There was no benchmarking system to evaluate the performance of the treasury team. 
• The company was not hedging its receivables.
• Often when the rupee appreciated the company had to face some losses on their accounts receivables. 

Process

• IFA prepared a detailed Risk Management Policy based on the business of the company, profitability, FX exposure, cash flow, and understanding of the industry peers and their strategies.
• Risk Tolerances and Benchmarks were clearly defined and hedging strategies were designed accordingly using Forwards and Options.
• The company was advised to hedge gross exports.
• Sell USD forwards when buying for imports/remittance (Import was naturally hedged and premia were received).
• Started hedging the net exposure of USD 11 million dollars which was not hedged earlier.

Outcome

• The strategy led to a premium income of about Rs. 1 crore.
• IFA was able to improve EBIDTA margins by 3 percent and clearly defined an FX profitability matrix.
• Most importantly volatility in FX was curtailed and brought within defined risk limits and certainty with an improvement in profitability
• Improved the reporting and review system by forming a Foreign Exchange Risk Management Committee with relevant policies and systems.