MMTC Ltd.

Analysis of Foreign Currency fluctuations and the hedging strategies

Partha Chandra (32B) Prachi Mukhija (33B) Prapunj Mishra (34B) Priya Juneja (35B) Puneet Garg (36B) Radhika Mediratta (37B) Rajesh Jaddu (38B)

INDEX
1. INTRODUCTION .. 3 2. 2010-2011 ANALYSIS .. 5 3. 2009-2010 ANALYSIS .. 8 4. 2008-2009 ANALYSIS .. 9 5. 2007-2008 ANALYSIS .. 10 6. 2006-2007 ANALYSIS .. 12

INTRODUCTION
Established in 1963, MMTC, one of the two highest foreign exchange earners for India, is a leading international trading company with a turnover of around US$ 10 billion. It is the largest international trading company of India and the first Public Sector Enterprise to be accorded the status of "FIVE STAR EXPORT HOUSE" by Govt of India for long standing contribution to exports. MMTC is the largest non-oil importer in India. MMTC's diverse trade activities encompass Third Country Trade, Joint Ventures, and Link Deals - all modern day tools of international trading. Its vast international trade network, which includes a wholly owned international subsidiary in Singapore, spans almost in all countries in Asia, Europe, Africa, Oceania and Americas, giving MMTC global market coverage.

MINERALS
MMTC is major global player in the minerals trade and is the single largest exporter of minerals from India. With its comprehensive infrastructural expertise to handle minerals, the company provides full logistic support from procurement, quality control to guaranteed timely deliveries of minerals from different ports, through a wide network of regional and port offices in India, as well as international subsidiary. MMTC has won the top export award from Chemicals and Allied Products Export Promotion Council (CAPEXIL) as the largest exporter of minerals from India for twentieth year in a row.

FERTILIZERS
As a leading player in fertilizers and fertilizer raw material, MMTC has become a major fertilizer marketing company in India, through planned forward integration of its import activities with the direct marketing of Urea, DAP, MOP, Sulphur, Rock Phosphate, SSP and other farming and agricultural inputs.

BULLION TRADER
MMTC is the largest importer of gold and silver in the Indian sub continent, handling about 146 MT of gold and 1250 MT of silver during 2008-09. MMTC supplies gold on loan and outright basis basis to the exporter, bullion dealers and jewellery manufacturers on all India basis. MMTC has retail jewellery & its own branded Sterling Silverware (Sanchi) showrooms in all the major metro cities of India. MMTC also supplies branded hallmarked gold and studded jewellery. Assay and hallmarking units have been set up at New Delhi, Ahmedabad & Kolkata for testing the purity of gold and gold articles duly accredited with Bureau of Indian Standards. Besides organizing major jewellery exhibitions in India & abroad, MMTC also has a medallion manufacturing unit for minting of Gold/Silver medallions. MMTC has its online retail website

NON FERROUS METALS AND INDUSTRIAL RAW MATERIAL

MMTC is India's largest seller of imported non-ferrous metals viz. copper, aluminium, zinc, lead, tin and nickel. It also sells imported minor metals like magnesium, antimony, silicon and mercury, as also industrial raw materials like asbestos and also steel and its products. MMTC imports quality products conforming to international specifications like ASTM or BSS or LME approved brands. Major institutional customers of MMTC in India are accredited with ISO-9002 status. MMTC sources its metals from empanelled suppliers including producers and traders throughout the world.

MMTC is a proud winner of gold trophy for exports of Engineering and Metallurgical product in non-SSI Sector and also awarded the All India Trophy for highest export in the category of prime metal by EEPC.

AGRO PRODUCTS
MMTC is amongst the leading Indian exporters and importers of agro products. The company's bulk exports include commodities such as rice, wheat, wheat flour, soya meal, pulses, sugar, processed foods and plantation products like tea, coffee, jute etc. MMTC also undertakes extensive operations in oilseed extraction, from the procurement of seeds to the production of de-oiled cakes for export, as well as the production of edible oil for domestic consumption. It also imports edible oils. MMTC has won the gold trophy from FIEO for highest exports in agriculture & plantation product in non-SSI Sector.

GENERAL TRADING
MMTC also handles items like textiles, Mulberry raw silk, building materials, marine products, chemicals, drugs and pharmaceuticals, processed foods, hydro carbons, coal and coke. Information on above can be supplied on request. MMTC also exports engineering products.

Premiums paid on Forward Contracts

2010-2011 191.82 2009-2010 152.63 2008-2009 186.55 2007-2008 107.07

Premium on Forward Contract

The premiums paid on forward contracts increased from 107.7 in 2007-2008 to 191.82 Million in 20102011. This can be mapped to the rise in Trade between these years.

700000.0 600000.0 500000.0 400000.0 300000.0 200000.0 100000.0 0.0 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Exports Imports

FY 2010-11
FOREIGN CURRENCY TRANSACTIONS ACCOUNTING POLICY
Transactions with rupee payment countries in respect of non-convertible Indian currency are being treated as foreign exchange transactions. Foreign currency monetary items (except overdue recoverable where reliability is uncertain) are converted using the closing rate as defined in the AS-11 issued by the Institute of Chartered Accountants of India. Non-monetary items are reported using the exchange rate at the date of the transaction. The exchange difference gain/loss is recognized in the Profit and Loss account. Liability in foreign currency relating to acquisition of fixed assets is converted using the closing rate as defined in AS 11 issued by the Institute of Chartered Accountants of India. The difference in exchange is recognized in the Profit & Loss Account. In respect of forward exchange contracts against existing underlying transactions, the premium / discount is recognized proportionately over the life of the contract. The loss/gain due to difference in exchange rate between (i) closing rate or the rate on the date of settlement if the transaction is settled during the year, and (ii) the exchange rate at later of the date of the inception of the forward contract or the last reporting date is recognised in the Profit & Loss Account for the year. In respect of forward contracts relating to firm commitments and highly probable forecast transactions, loss due to exchange difference is recognized in the Profit & Loss Account in the reporting period in which the exchange rate changes. Any profit or loss arising on renewal or cancellation of such contracts is recognized as income or expense for the period. Investments in subsidiary company outside India are translated at the rate of exchange prevailing on the date of acquisition

Currency translation
Transactions denominated in a currency other than United States Dollar (foreign currency) are translated into United States Dollar using the exchange rates prevailing at the dates of the transactions. Currency translation differences resulting from the settlement of such transactions and from the translation at the closing rates at the balance sheet date of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.

CHANGES IN PROFITABILITY DUE TO EXPOSURE TO FOREIGN CURRENCY

Gain due to exchange rate
An amount of Rs. 228.54 million ( L.Y. Rs. 241.80 million) towards difference in exchange ( gain) has been shown under cost of sales which has arisen mainly due to adoption of notional exchange rate applicable on the date of bills of lading for initial recognition in reporting currency in respect of import purchases / export sales denominated in foreign currency.

Loss on derivative contracts

The company accounted for a loss of Rs. 1,108,041 on derivative contracts for FY 2011.

Cash and bank deposits

United States Dollar Singapore Dollar In current account in Foreign currency $ 17,892,124 $ 77,559 $ 0.27 mn [Schedule 8 Annual Report 2010 11]

Forward Contract premium

The company paid a forward contract premium of $ 191.82 mn The proportionate forward premium of Rs. 724.65 million (LY 226.26 million) for imports and Nil million (L.Y. Nil million) for exports is to be recognized in the Profit & Loss Account of the subsequent accounting year in terms of the provisions of Accounting Standard 11 issued by the Institute of Chartered Accountant of India. In respect of forward exchange contracts outstanding as on 31.3.11 relating to firm commitments and highly probable forecast transactions, the loss of Nil million (P.Y. loss of Rs. 0.75 million) has been recognized in the Profit & Loss account on the basis of changes in exchange rate as at the close of the year.

FINANCIAL RISK MANAGEMENT

Financial risk factors
The Companys activities expose it to market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Companys overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Company. Risk management is carried out under policies approved by the Board of Directors. The Board of Directors and the holding corporation provide guidelines for overall risk management, as well as policies covering these specific areas.

1. Market risk
Foreign currency exchange rate risk The Companys business operations are not exposed to significant foreign currency risks, as it has no significant transactions denominated in foreign currencies. Interest rate risk Interest rate risk arises primarily with respect to short-terms borrowings under import and export financing. The Company monitors market interest rates closely to ensure that favourable interest rates are secured. At balance sheet date, the Company has minimal exposure to interest rate risk. Price risk The Company has insignificant exposure to commodities price risk as it does not hold significant commodities financial instruments.

2. Credit risk
Bank deposits that are neither past due nor impaired are mainly deposits with banks with high credit ratings as determined by international credit rating agencies. The Company has no significant concentration of credit risk except for amount due from holding corporation which has a good collection track record with the Company. The Company has policies in place to ensure that sales of goods are made to customers with adequate financial standing and an appropriate credit history. At balance sheet date, there is no class of financial assets that is past due or impaired.

3. Liquidity risk
The Company manages liquidity risk by maintaining cash and available funding through an adequate amount of committed credit facilities sufficient to enable it to meet its operational requirements. The Companys major classes of financial liabilities are trade and other payables and borrowings and their contractual maturities are less than one year.

4. Capital risk
The Companys objectives when managing capital are to ensure that the company is adequately capitalised and to maintain an optimal capital structure by issuing or redeeming additional equity and debt instruments when necessary. The Company monitors capital on the basis of the total shareholders equity as shown on the balance sheet. The Company is not subject to any externally imposed capital requirements for the financial years ended 31 March 2011 and 2010.

FY 2009-2010
The Foreign Exchange flow of MMTC is as following: Earnings Rs. In Million Exports Others 32247.14 226.15 Imports Interests Others Total 32473.29 Total Outgo Rs. In Million 405703.64 362.63 877.03 406943.30

The proportionate forward premium of Rs. 226.26 million (LY Rs. 182.46 million) for imports and Rs. Nil million (L.Y . Rs. Nil million ) for exports to be recognized in the Profit & Loss Account of the subsequent accounting year in terms of the provisions of Accounting Standard 11 issued by the Institute of Chartered Accountant of India. In respect of forward exchange contracts outstanding as on 31.3.10 relating to firm commitments and highly probable forecast transactions, the loss of Rs. 0.75 million (P .Y . loss of Rs. Nil million) has been recognized in the Profit & Loss Account on the basis of changes in exchange rate as at the close of the year . In the cash flow statement, the foreign exchange loss is Rs. 324.48 million. Also, the net currency translation loss is $ 11,266. The company claims that the Companys business operations are not exposed to significant foreign currency risks, as it has no significant transactions denominated in foreign currencies. MMTC raised unsecured loans from foreign banks to the tune of Rs. 5,504.36 million

FY 2008-2009
Earnings Rs. In Million Exports Others 45788.40 159.66 Imports Interests Others Total 45948.06 Total Outgo Rs. In Million 306271.95 1007.16 2132.58 309411.69

a) b)

Cash, Stamps & Cheques in Hand Bank Balances in India in Current Account in Cash Credit Account (Debit Balance) in Current Account in Foreign Currency in Term Deposits ( including under lien/ lodged as security) Bank Balances outside India in Current Account in Term Deposits Share of interest in Joint Ventures Total

152.49

713.10

375.32 426.95 0.30 57624.99

2012.10 951.68 0.87 55842.69

c)

d)

54.47 890.70 59525.22 121.89 59647.11

10.40 689.72 60220.56 9 2.38 60222.94

1. The proportionate forward premium of Rs.182.46 million (LY Rs. 107.07 million) for imports and Rs. Nil million (L.Y. Rs. Nil million ) for exports to be recognized in the Profit & Loss Account of the subsequent accounting year in terms of the provisions of Accounting Standard - 11 issued by the Institute of Chartered Accountant of India. 2. In respect of forward exchange contracts outstanding as on 31.3.09 relating to firm commitments and highly probable forecast transactions, the loss of Rs. Nil million (L.Y. loss of Rs. 36.11 million) has been recognized in the Profit & Loss Account on the basis of changes in exchange rate at the close of the year. 3. Adhoc liability of Rs.66.21 million (L.Y.Rs. 121.80 million) has been made during the year towards pay revision of the employees of staff cadre which has become due w.e.f. 01.01.2007 having regard to the wage revision of officers already effected as per DPE guidelines. Further a liability of Rs 59.81 million towards perquisite & allowance from 26.11.08 to 31.03.09 and Rs 50.00 million towards superannuation benefit w.e.f. 1.1.07 has been made during the year as per DPE guidelines for wage revision. 4. In the cash flow statement, the foreign exchange Gain is Rs. 234.84 million. Also, the net currency translation loss is $ 11,266.

FY 2007-2008
Effect of exchange rate fluctuations on profitability The analysis starts with the way the stock performed on the BSE and the $/Rupee exchange rate.

Exchange Rate Apr '07 - Mar '08

42.5 42 41.5 41 40.5 40 39.5 39 38.5 38 37.5 $/Rupee

Month

The firm started April 2007 with the stock hovering around Rs.112 and exchange rate falling. This was after an interim dividend payout of 25%. But, the volume to this friendly event went unheard and the prices fell throughout April into July. It was at the AGM in September when they announced to give 25% dividend payout and this was when the exchange rate had fallen quite a bit, the wheat imports had grown and fresh tenders were called for wheat imports by MMTC Ltd. Associated with the fact was the continuous volume pumping by the investors in the stock which saw the stock prices moving from Rs.274 on 6 September 2007 to 1126 on 17 October 2007 to Rs.2124 on 2 November 2007. This continuous rally was sharp. But, a flattened Dollar/Rupee rate through December and a sharp depreciation in January into March led to the price of the share at Rs.1078 on 03 March 2008. So, the period saw a sharp rise and a sharp decline of the share price. Dividend was declared as a mark of companys profit making, but what they werent able to enthuse in March, they were able to flux in September. In terms of profitability and company financials: Profit after tax (PAT) touched Rs.2005 million, a 58% increase Exports grew 15% to Rs.39114 million Imports grew 9% to Rs.204499 million Reserves and surplus 15% to Rs.9800 Lost Rs.26.91 million due to adverse foreign exchange movement in operating activities

The exchange rate movement, also, caused a lot of income as well as outgo of exports and imports earnings.

Forex tools used MMTC used forward contracts as a hedging tool in the financial year 2007-08. In respect of forward exchange contracts outstanding as on 31.3.08 relating to firm commitments and highly probable forecast transactions, the loss of Rs.36.11 million has been recognized in the Profit & Loss Account on the basis of changes in exchange rate at the close of the year.

Foreign currency loan portfolio The foreign currency loan for financial year 2007-08 was made by MMTC Ltds subsidiary MMTC Transnational Pte. Ltd. and was to the tune of $499472. The carrying amounts of the borrowings are denominated in United States Dollar and approximate their fair values. The borrowings have an average maturity of 14 days from the balance sheet date. The weighted average effective interest rate of the borrowings at the balance sheet date is 3.48% per annum.

FY 2006-2007
Introduction The year 2006-07 was a watershed year in the sense that MMTC has surpassed all its previous benchmarks of performance and in the process raising the bar to greater heights of achievements. During 2006-07 MMTC the largest trading company in India - exhibited outstanding performance by achieving its Highest ever business turnover of Rs. 233016.23 million during 2006-07 registering a growth of 42% over the previous year. This ever -best business turnover since MMTC's inception in 1963 includes Exports of Rs. 34131 million and imports of Rs. 186074 million -- both the highest ever performance in last 44 years. The other trade related earnings contributed Rs. 445.13 million. The net profit earned by your Company recorded a growth of 17% over previous year and is the highest profit earned by the Company since inception.

Financial Overview

Foreign Exchange Earnings and Outgo

Finance, Liquidity & Risk Management The company has been following prudent fund management strategies. To provide for the liquidity risks that may arise due to non-budgetary outflows or due to unanticipated delays in realization, adequate credit lines are maintained for short-term funding of trade transactions, which do not bear any commitment charges towards unutilized limits. MMTC continues to be a zero long-term debt company. The currency transaction/ swap rates are being continuously monitored and exposures hedged, as and when necessitated, against the possible adverse movements. The International markets/suppliers are tapped from time to time to avail cheaper sources of funds as also interest rate

arbitrage. MMTC also takes requisite insurance covers at competitive terms/rates to hedge the risks associated with international trading operations. The legal cell of the company ensures compliance of diverse statues and takes legitimate remedies to recover dues from defaulting associates besides defending the company against various claims. The "Disputes Settlement Committee" which has been in operation for amicable resolution of disputes with business associates, in its 10 meetings held during 2006-07 settled seven cases involving an amount of Rs. 41.4 million. Reaching out to the customer To facilitate promotion of two-way trade, MMTC is progressing satisfactorily on setting up of free trade and warehousing zones (FTWZ) at certain identified locations in India. These zones would be on lines similar to Special Economic Zones with the essential difference that, apart from being deemed foreign territory, they would provide state of the art, world class storage facilities of different types to cater to varied types of goods and users. As part of the FTWZ initiative, in order to provide non-ferrous metals supplies at the customers doorstep, it is proposed to open an LME (London Metal Exchange) warehouse in India. Currently Indian customers have to source their requirements from LME warehouses at Singapore, Rotterdam and Dubai, leading to higher inventory carrying costs and longer delivery lead-time. Accounting policies followed in Foreign Currency Transactions a) Transactions with rupee payment countries in respect of non-convertible Indian currency are being treated as foreign exchange transactions. b) Foreign currency monetary items (except overdue debts or where reliaibility is uncertain) are converted using the closing rate as defined in the AS-11 issued by the Institute of Chartered Accountants of India. Non-monetary items reported using the exchange rate at the date of the transaction. The exchange difference gain/loss is recognized in the profit and loss account. c) Liability in foreign currency relating to acquisition of fixed assets is converted using the closing rate as defined in AS-11 issued by The Institute of Chartered Accountants of India. The difference in exchange is adjusted in the cost of the assets. d) In respect of forward exchange contracts, the difference between the forward rate and the exchange rate at the date of inception of the forward contract are recognized as income or expense over the life of the contract. e) Investments in subsidiary company outside India are translated at the rate of exchange prevailing on the date of acquisition. Financial risk management The Companys activities expose it to a variety of financial risk, including the effects of changes in foreign currencies exchange rates. The Companys overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Company. Risk management is carried out under policies approved by the Board of Directors. The Board of Directors and the holding corporation provide guidelines for overall risk management, as well as policies covering these specific areas.

(i)

Foreign currency exchange rate risk

The Company does not have significant exposure to foreign currency exchange rate risk as it transacts mainly in US Dollars, which is its functional currency. (ii) Interest rate risk

Interest rate risk arises primarily with respect to short-terms borrowings under import and export financing. The Company monitors market interest rates closely to ensure that favourable interest rates are secured. (iii) Credit risk

The Company has no significant concentration of credit risk. The Company has policies in place to ensure that sales of goods are made to customers with adequate financial standing and an appropriate credit history. (iv) Liquidity risk

The Company maintains sufficient liquidity and has committed credit facilities available from banks to make available adequate funding for Companys operating requirements. Consolidated Financial Statements (w.r.t Foreign Currency Impact)