i Develop Stocks Advisory

Now it is M 2 M Gains MTM Gains…. The marked-to-market losses incurred by companies on exotic foreign exchange derivatives deals sold by banks. Fitch Ratings has gone on record saying that the total mark to market (MTM) losses of Indian companies on foreign exchange derivative transactions is estimated to be $ 3 billion to $ 3.5 billion. The more vulnerable segment of small and medium size (SME) enterprises accounts 25 per cent of MTM losses. Many firms have also moved court against banks, alleging that exotic forex derivatives were mis-sold. The rating agency further stressed the need to review the risk management strategies of companies and banks. "Banks, in particular, need to further refine their derivatives underwriting policies, including practices for assessing potential future exposures," Fitch said. while also adopting a more conservative approach towards capital allocation," Fitch said. Amtek today informed the stock exchanges that it could potentially make a loss of up to $18 million (Rs 72.18 crore) in the next two years on its exposure to currency hedges and swaps. Mark-to-market (MTM) losses of 46 companies on account of foreign exchange contracts, fluctuation in exchange rate and commodity hedging aggregated to Rs 1,365 crore so far, as per their results for the March 2008 quarter. The losses account for 8.2 per cent of the net profit of the 46 firms, which have reported a net profit growth of 24.3 per cent after provisioning. The information culled from the quarterly results shows 13 firms have made provisioning of Rs 302 crore for MTM losses on account of derivative contracts, 18 firms have provided Rs 800 crore for exchange rate fluctuations, four firms have provided Rs 118 crore for forex hedging and the remaining 11 have provided Rs 143 crore for commodity hedging and interest cost on foreign currency convertible bonds (FCCBs). The MTM losses declared so far appear to be modest if one considers the exposure of Indian firms to overseas loans. The combined figure of derivative exposure by the India firms is not know, but State Bank of India (SBI) has confirmed that its 300-odd clients in the forex derivatives segments have MTM losses of Rs 600-700 crore, while ICICI Bank has preferred not to divulge any details on the probable MTM forex derivatives losses of its clients. The borrowings on account of FCCBs aggregated to $11 billion (Rs 44,000 crore at exchange rate of Rs 40), while the external commercial borrowings (ECBs) amounted to $31.6 billion (Rs 126,400 crore) during the financial years 2005-06 and 2006-07. Among the forex losers, ICICI Bank's treasury income was down 63 per cent as it recorded Rs 400 crore MTM losses on its overseas investments during the fourth quarter. The bank also holds investments worth $5-5.5 billion in its UK and Canada subsidiaries, where it set aside about $60-70 million as MTM provisions in their Profit & Loss account. Finolex Cables reported a forex loss of Rs 3.6 crore on hedge contracts and made provisioning of Rs 9.2 crore on outstanding forex contracts. Infosys Technologies reported hedge revenue worth $760 million in the fourth quarter and posted a forex loss of Rs 45 crore. Maruti Suzuki made MTM loss provisioning of Rs 50.5 crore on its forex derivatives and a one-time expense of Rs 54.5 crore as compensation to dealer. Bharti Airtel made its forex loss as finance cost and JSW Steel charged it to other expenditures. Few other companies such as Alps, Alok Industries, Ranbaxy, Bharati, Bhushan Steel, JSW, Reliance, Arbindo Pharma Jet Airways where there MTM but all the co’s may not have provided for the same. Reliance has not provided MTM losses of Rs 940 crs whereas R Com Rs 1063 crs, Bharati Rs 260 crs Bhushan Rs 25 crs and Jet 625 crs. The turmoil in global financial markets has given Indian companies one more reason to worry about - mark-to-market losses. Across sectors, several leading companies that have announced the results for the quarter ending June 2008 have taken MTM hits in some form or the other. In some cases, MTM losses pushed some companies into the red on account of such provisions. MindTree Consulting turned into red on account of MTM forex losses of Rs 50 crore, which is nearly quarter of its revenues in June 2008 quarter. Pharma major Biocon's bottom-line was also hit hard on account of MTM losses. Its net profit stood at Rs 15 crore for this quarter against Rs 53 crore last quarter due to MTM losses of nearly Rs 26 crore. High profile victim of this is Power Finance Corporation (PFC), which has reported a net profit of Rs 296 crore in Q1 FY09 versus Rs 309 crore for the same period last year. PFC has provided for forex losses of Rs 58 crore compared with a gain of Rs 28 crore in the previous quarter. Axis Bank made a provision for over Rs 250 crore to cover losses from the decline in the value of their bond and equity holding. Reliance Communications suffered Rs 25.3 crore losses due to exchange rate fluctuations and MTM of derivative instruments. SBI reported a forex loss of Rs 100 crore due to reversal of excess forex income booked till nine months of fiscal 2007-08. The loss was not on account of any forex derivatives. The losses for FCCB and ECB issuers are on account of provisioning for interest cost and, for a few of them, for keeping the money in foreign accounts. Kotak Mahindra Bank today said it has made a provisioning of Rs 86 crore to cover the Mark-to-Market (MTM) losses of its clients on account of forex derivative transactions. Now the bottom line is that when the forex derivative losses hit the desk USD was at low of 94 as against yen. Now USD has climbed back to 110 USD and very close to the level of 114 from where the problem started. Having made huge recovery all the companies which have provided for MTM losses in March quarter are set to gain in Sept quarter as the provision has to be reversed. It should be noted that the MTM were only provision against the fall in the value of USD as per the A S 30 of ICAI and not actual losses. All the companies which have provided such MTM will stand to gain in terms of write back of provision no longer required. Beneficiaries of the stock are Reliance, R Com, Biocon, Bharati, Amtek, Alok, Maruti, Tata Motors, JSW, Jet Airways, Tisco, Yes Bank, Ranbaxy, ICICI Bank, HDFC Bank, Kotak Bank and other PSU banks.