Paper Product Companies - How does efficient borrowing impact your profitability?

• A Paper product company (XYZ Ltd) with a USD export exposure of INR 150 crore. 
• Foreign currency was not hedged. 

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 client used to run the business on his own personal funds. The cost of which was around 7% per annum. No hedging of forex was done.
• The company had a working cycle of 2 months which used to require the working capital cost of 25 crores.

Process

• IFA team advised the client to opt for PCINR (Export packing credit in rupees) which his bank was ready to offer him at 7%.
• The client was eligible for a subvention scheme that would reduce the client's cost by 3%, bringing the effective rate to 4%.
• 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.

Outcome

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

• Cost of the fund was reduced to almost zero (PCINR rate of 7%-3% subvention-4% forward premium earned)
• This resulted in to gain of around 1.75 crores of profit on 25 crores of working capital requirement.
• IFA was able to improve EBIDTA margins by 1.5 percent.
• IFA team also 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.