Hedging Policy and the Board's Exchange-Rate View at Sunbeam Apparels
Sunbeam Apparels exports home textiles. FY25 revenue was ₹5,420 crore at an 11% EBITDA margin. Exports are invoiced 70% in USD and 30% in EUR; about 45% of raw material is imported and paid in USD within 60 days of invoicing. Policy is to hedge booked receivables with forwards at 60% of net exposure, leaving the balance open. The company has just shipped USD 14 million of receivables due in 90 days and has USD 9 million of import payables due in 150 days. Spot USD/INR is 87.40; the 90-day forward is 87.85; a 90-day USD put at 87.50 costs ₹0.48 per dollar; a 90-day call at 89.30 is bid at ₹0.42. The CFO told the board the rupee will touch 90 and argued for cutting the hedge ratio to 20%; the promoter-director wants 90%. The bank has offered a zero-cost collar.
1. Quantify the outcome on the USD 14 million receivable at spot rates of 84.00, 87.40 and 91.00 under four alternatives: no hedge, forward, outright put, and the 87.50/89.30 collar.
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All amounts in ₹ crore; USD 14 million at 1 paise = ₹1.40 lakh.
| Spot at maturity | Unhedged | Forward @87.85 | Put @87.50 (premium ₹0.48) | Collar 87.50/89.30 |
|---|---|---|---|---|
| 84.00 | 1,176.0 | 1,229.9 | 1,218.3 | 1,218.3 |
| 87.40 | 1,223.6 | 1,229.9 | 1,218.3 | 1,223.6 |
| 91.00 | 1,274.0 | 1,229.9 | 1,267.2 | 1,250.2 |
Mechanics.
- Forward: locked at 87.85 on the full notional.
- Put: floor of 87.50 less premium 0.48 = 87.02 net; upside retained above 87.50 but reduced by 0.48.
- Collar: floor 87.50, cap 89.30, zero premium, so the outcome is bounded between 1,218.3 and 1,250.2. At spot 91.00 the cap bites and the extra 1.70 of upside is forgone - that is the price of the free floor.
Range comparison. Unhedged outcome spans ₹98 crore (1,176 to 1,274), roughly 16% of EBITDA. The forward compresses this to zero but caps the upside at 1,229.9. The collar retains 1,250 of upside while giving a floor only 11.6 crore below the forward - better risk-adjusted than the outright put, which costs ₹6.7 crore regardless of outcome.
Note on netting. The USD 9 million payable is due at 150 days, not 90. Netting the two into a USD 5 million exposure is analytically wrong: the payables are not yet firm in all cases and the maturity mismatch leaves 60 days of uncovered risk. Netting is valid only for matched maturity and certain cash flows.
2. Evaluate the CFO's proposal to cut the hedge ratio to 20% on the basis of a 90 view, and the director's counter-proposal of 90%.
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Both proposals are view-driven, and both are governance failures - but not symmetrically.
The CFO's 20%. A hedging policy exists to remove an exposure the company is not paid to take. Sunbeam earns 11% EBITDA margin; a 1% move in USD/INR on full USD receipts of roughly ₹5,400 crore of exposure is worth about ₹54 crore, or 9% of EBITDA. A 4% depreciation from 87.40 to 91.00 is worth ₹216 crore - larger than a year's EBITDA. A treasurer with a directional view is effectively running an unhedged proprietary position sized at many times the operating profit, funded by the balance sheet and endorsed by nobody.
Worse, the view is not even internalised in pricing. Competitors quote in USD; if the rupee strengthens to 84, Sunbeam's landed price rises in dollar terms and it loses orders precisely when its margin is already squeezed. The hedge ratio should be set so the order book can be priced at a sustainable rupee rate, and should be reviewed against a budget rate, not a forecast.
The director's 90%. Over-hedging creates its own problem: if the rupee moves to 91, the company has locked in 87.85 while its competitors collect spot. It will be undercut on the next quotation round. It also creates a mark-to-market liability on the forward book that must be collateralised or provided for, consuming working capital.
Recommendation. Set the policy ratio at 70% of firm committed exposure and 0-30% of highly probable forecast exposure, and state explicitly that the ratio is not a market call. Use the collar for the portion where forward premium (2.05% annualised, or roughly 51 paise for 90 days) is judged too expensive, and reserve forwards for matched receivables against payables. Any deviation beyond the band should require board risk-committee approval, minuted with the rationale.
3. A Kenyan distributor wants to be invoiced in Kenyan shillings for a USD 1.2 million annual order. How should Sunbeam price and structure this?
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There is no liquid KES/INR forward market of usable depth, and even USD/KES forwards beyond short tenors are expensive, so this is a convertibility and pricing problem rather than a hedging problem.
Build the quote from the top down. Start with the USD price, then apply:
- Expected depreciation. Kenyan inflation has typically run ahead of US inflation, so an interest-rate-parity style estimate is the anchor: forward ≈ spot × (1 + i_KES)/(1 + i_USD). If KES yields are, say, 13% and USD yields 4.5%, the implied annual depreciation is roughly 8%. Price at least that.
- Convertibility and transfer risk. A premium of 3-5% for a market with periodic FX allocation constraints and payment delays. This is not a hedge - it is not hedgeable - so it must be earned as a margin.
- Timing cost of the exposure. The 90-120 day gap between invoicing and conversion adds a further carry cost; invoice at sight or against documents.
Structural alternatives, in order of preference. (i) Invoice in USD, shifting FX risk to the distributor who can hedge locally; (ii) invoice in USD but allow payment in KES at the prevailing rate on the value date, so Sunbeam never takes the KES position; (iii) if KES invoicing is commercially essential, require a confirmed irrevocable letter of credit from a Kenyan bank acceptable to the Indian bank, and price in the full depreciation plus a 4% risk loading; (iv) use a forfaiting or export factoring arrangement to discount the receivable without recourse.
The judgement point. Sunbeam cannot hedge this exposure, so the only correct answer is to either pass the risk to a counterparty who can price it, or be paid to hold it. Accepting the order in KES at a spot-derived price because the distributor is 'strategic' is how exporters lose a year's margin on a single account.