How about currency risk management?
Suresh K Senapati: Wipro follows a strategy of hedging its inflows for the next four to six quarters, with earlier quarters more tightly hedged than the later ones, with a view to bringing in certainty to our cash-flows, and to protect us from volatility in currency movements.

As part of our hedging policy, we chiefly use forward covers. We follow a cash-flow hedging principle, whereby we designate the hedging instruments against forecasted cash flows.

V Srinivas: For Satyam, a key objective is to identify and minimize the impact of adverse exchange rate fluctuations on the financial position of the company.  The main exposures to risk are transaction exposure, translation exposure and economic exposure. Strategies (to hedge or not to hedge or to selectively hedge currency risks) and means (products and tools for hedging) of managing risks have been defined through specific policies.  Management and control procedures are defined stating senior management and committees that are empowered to advise limits, products and monitoring of actions.  We use forward contracts, option products and diversification of currency risks in managing our currency risk management.

Sandeep Kanwar: HCL Insys has internal guidelines for hedging foreign currency exposure. Moreover, inputs from various bank treasuries and consultants are also considered for deciding on a hedging strategy. Product pricing is done keeping in view the prevailing currency rate and the premia there on. Pricing is regularly revisited and changed for any major fluctuations in currency.

V Balakrishnan: Infosys is exposed to currency risks, as we earn over 98% of our revenues from the global markets. We have natural hedge against adverse movements of the rupee vis-a-vis the other currencies, with over 50% of our expenses being non-rupee denominated. For the balance exposure, we use a mix of forward contracts and options to hedge our balance sheet risk.

SL Narayanan: HCL Tech has a policy to avoid speculation in foreign currencies as far as possible. Typically, the company limits its foreign currency exposure to not more than 50% of annual net foreign currency flows. The company also limits the size of transactions to daily maximum of $10 mn. Under exceptional circumstances, when rates available in the forex markets are above business plan assumptions, the company makes slightly larger transactions. The basic principle is to stagger the hedging activity, so that we neither have windfall gains nor alarming losses.

S Mahalingam: TCS hedges foreign currency risk on net exposure basis for major currencies. Hedge strategy is based on achieving the benchmark rate, so as to provide stability in revenue.  The increased use of derivatives enables us to protect benchmark, at the same time, benefit in the case of strengthening of billing currency.

The risk management committee, consisting of CFO and other senior members of the management, reviews the strategy and effectiveness of the strategy. The committee also formulates/guides on the strategy to be followed during the next rolling twelve months and are reviewed every quarter. 

How do you appraise capital expenditure? What is the hurdle rate you'd look for?
Suresh K Senapati: For Wipro, the hurdle rate for internal capital expenditure is not critical, since all of our businesses have a RoCE (return on capital employed) greater than 50%. Hence, as long as we see demand visibility, we go ahead and execute the project, based on our requirements.

With respect to external projects and acquisitions, we target a benchmark rate of return of around 20%.

V Srinivas: The major capital expenditure is infrastructure and facilities development, which evolves from three-year strategic plan and detailed business forecasts. Satyam chooses between own and leased infrastructure based on the urgency of requirements and quality of deliverables in terms of world class standards. An investment benefit analysis is used for evaluating own vs leased infrastructure in which cost of capital is one of the key variables.

Sandeep Kanwar: For major capital expenditure/projects, HCL Insys draws up a business plan. All the major capital expenditure are covered in the business plan. Actual expenses, RoI and revenue are monitored and compared with the business plan on a regular basis. Corrective action is taken for variance if any. Different approaches are applied depending on the type of project ie mandatory, replacement, expansion, diversification, R&D etc. Appropriate measures like cost effectiveness, growth in revenue and margin thereon, RoI, payback period, and WACC are applied for evaluation.

V Balakrishnan: Capital expenditure projects that pass the strategic rationale screening test are evaluated based on the payback period, positive contribution to profitability and the return on capital. Infosys uses the cost of capital as the hurdle rate.

SL Narayanan: HCL Tech estimates its cost of equity to be around 19%. It consequently takes in projects with projected cash flows providing an additional margin of safety of 10%. Hence, the company looks at an IRR of 29%. Specifically for M&A transactions, the company is conscious of the risks involved and looks particularly closely at non-financial parameters such as culture fit, repeat clients and client concentration apart from the normal financial rates.

S Mahalingam: TCS follows a system whereby capital expenditure approved by the board is broken up into logical modules.  Each of these modules is evaluated in terms of costs and timelines for execution.  The follow up process involves study of these deliverables and variances in terms of costs and time.  This review is done at a fairly high level of management.

How do you plan for cash reserves? How do you decide on changes required?
Suresh K Senapati: Determining the appropriate level of cash reserves is a strategic decision, which depends on the requirement of organic growth, coupled with possible inorganic supplements in the form of acquisitions. Normally, planning for our cash reserves is based on a two-three year horizon, taking into account capital expenditure in our business, along with any inorganic move we may choose to pursue in the future. As of March 31, 2006, Wipro had $881 mn of cash reserves. Whenever the reserves exceed our defined needs, we may choose to return it to our shareholders in the form of dividend. For example, in 2003-04, we declared a special dividend of Rs 5,820 mn to our shareholders.

V Srinivas: Satyam believes that the strong balance sheet and the liquidity that we have will help us deploy resources and build infrastructure to capitalize on the demand flow. We are also exploring a number of inorganic growth opportunities, which will help us acquire skills, competencies and scale in areas that we choose to grow our business. Hence, the cash reserve is essentially to capitalize on the opportunities as well as overcome the challenges of a dynamic business environment.

Sandeep Kanwar: HCL Insys plans for the cash reserves considering several factors. They include future business plan requirements, capital expenditure/expansion plans, new product launches, acquisition plans and, large projects.

Seasonal fluctuations and contingencies are also taken into account. While looking at changes in cash reserves, several things are considered such as any change in business plan during the year, unplanned large orders bagged, and interest rate outlook.

V Balakrishnan: Infosys policy is to have a highly liquid balance sheet as we are in an environment characterized by swift changes in technology, consequent rapid obsolescence and shifts in client spending patterns that cause revenue volatility. An essential part of our de-risking strategy is to have a liquid balance sheet and sustain profitability. We want to maintain cash to meet the next one year's expenses at any point of time. We also want to maintain liquid assets at 25% of revenues and 40% of total assets at any point of time. Our dividend policy is to pay upto 20% of the net profit as dividend to shareholders each year. We have clearly articulated our returns policy, which requires us to earn a minimum of twice the cost of capital as return on capital employed and a minimum of thrice the cost of capital as return on invested capital.

SL Narayanan: HCL Tech had significant cash reserves after the divestment of its stake in a JV with Perot Systems; the overall liquidity levels have been brought down over the last three years by a significant change in our dividend policy. The company, however, intends to keep at least a $300 mn reserve for future acquisitions and maintain a strong balance for both downturns and improved client comfort. The company is able to meet capital expenditure and dividend payouts from operating cash flows.

S Mahalingam: At TCS, operating cash flows are budgeted and monitored on a regular basis to arrive at reserve of operating cash. Capital budgets and funds reserved for investments/other business opportunities help in deriving cash reserve out of operating flows.

Sushanto Mitra
The author is the Director of Techcap India Private Limited
No liability accepted for accuracy of this information
sushanto@techcapIndia.com

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