Financial Risk Management

‡ Mstablished in 1940 as ³National Radio & Mlectronics

Company Limited´

‡ A Tata Mnterprise, Subsidiary of Tata Power, 50.1%

‡ Works & Facilities- 75,000sq.ft at Mahape, Navi Mumbai

‡ Focus on Complete Automation

‡ Project based business

 Yusiness Segment- ISG
O


 




! Ñefense Mstablishments ! Security & surveillance Systems
! Homeland Security segment ! Automated Weather Monitoring
Systems
Strategic Mlectronics ! Systems Integration for Jammers, etc
! AMC

! Indian Railways(CLW & ! Traction Converters

ÑLW) ! Auxiliary Converters
Traction Mlectronics
! Control Mlectronics
! Maintenance & Service
! Power T&Ñ ! SCAÑA
! Railways ! MNMS-SCAÑA
MNMS-SCAÑA ! Oil & Gas ! ÑMS
! Water ! MMS
! AMC
! Shopping Malls ! YMS, Access Control, Fire Alarm &
! Commercial Complex, SM s CCTV
YMS ! Hospitality, IT Parks,
Pharmacy etc
 Risks
‡ Anything that poses a threat to an organization

‡ Nelco¶s Risks :
1. Technology including Information Technology
2. Suppliers
3. Customers/ Markets
4. Competition, Strategy & growth
5. Human
6. Operations
7. Financial
8. Process R & Ñ or Product/ Service Ñevelopment
9. Governance
10. Legal & Regulatory
 Financial Risks
‡ Probability of loss inherent in financing methods of a firm

‡ Types of Financial Risks:

1. Foreign Mxchange Risks

2. Interest Rate Risks
3. Commodity Price Risks
4. Capital Risks
5. Liquidity Risks
6. Credit Risks
 Foreign Mxchange Risks
‡ Arises out of long or short position in a currency

‡ Mxposures in Forex Risks:

1. Transaction ± Mg: Import of VSAT terminal for $1,000,000
(9th July, 2009-Rs.45.3 & 19th Mar,2010- Rs.48.8)

2. Mconomic - arise due to competition within the local industry from

foreign MNCs.

3. Translation - effect of exchange rate changes while translating the

earnings of Foreign subsidiary
 Forex Risk Management Policy
‡ Objective- To hedge the risk arising out of exposure

‡ Risk owners -LOY heads

Report net exposures regularly

‡ VaR- calculated to arrive at acceptable levels of unhedged net

exposures

‡ ..\SUMMERS DOC\IMP
SUMMER\FOREX_REPORTS30.04.2010.xls
 Foreign Mxchange Policy of Nelco
Report
Ltd.
Particulars Responsible Frequency Receiving
No. Ñepartment entity
1 Statement showing VAR and Treasury Monthly Treasury
hedging ratio Ñepartment Risk
Committee
2 Statements showing net open Yusiness division Monthly Treasury
position of individual business concerned Risk
divisions for next 3 months. (Consolidated by Committee
Treasury
Ñepartment)
3 Statement showing details of Treasury Monthly Treasury
currencies hedged, ,tools used, Ñepartment Risk
amount of exposure hedged Committee
etc.
4 Ñivision wise currency wise Treasury Monthly SY
Accountants
statement for each LOY of Ñepartment
actual forex exposure
materialized during the
previous month
6 Report on forex exposure for Treasury Quarterly Yoard of Ñirectors
the board. Ñepartment
 Interest Rate Risks
‡ Probability that arises out of changes in interest rates

‡ Short Term loans

1. Floating rates based on YPLR
2. Majority at Fixed rates
‡ Suppliers Credit
1. Floating rates based on LIYOR

‡ Impact on Yase rates

‡
se of Interest rate derivatives-Interest rate Swaps.

 Commodity Price Risks
‡ Arises from changes in prices of steel, copper, oil
etc.

Source: Accenture
 Liquidity Risks
‡ Arises out of non-availability of sources of funding

‡ Inability to sell products to fund short term financing

requirements

‡ Altman¶s score= 
(2007-08: 2.61)

‡ Interpretation: Grey one

 Credit Rating
6 Nelco¶s Credit rating agency- CRISIL
6 Outlook- Negative from Stable
6Yusiness Risk Profile- Low
6Financial Risk Profile- Weak
@
 
   

   
  
  
1 Cash Credit 29.24 A/ Negative A/ Negative Reaffirmed
limit
2 Term Loan 30.22* A/ Negative A/ Negative Enhancement

3 Letter of Credit 84.30^ P1 P1 Enhancement

4 Bank 41.61# P1 P1 Enhancement
Guarantee
5 Short Term 45.00@ P1 P1 Enhancement
Loan
 Credit Risks
‡ Mxposures of potential losses due to counterparty default

‡ @


1. Ministry of Ñefense
2. Tata Motors
3. Indian Railways
4. Siemens Limited
5. Steel Authority of India Limited
6. Tata Power Company Limited

‡

Ł 2008-09:Rs.7,298,000
Ł 2007-08:Rs. 1,613,000
a 

  

Level
Foreign currency Low
volatility
Interest Rate Low
Fluctuations
Fluctuations in Low
Commodity prices like
steel, copper & oil, etc
A/C receivable Low
risk(impact of slowing
economy on paying
capacity of our
customers & suppliers)
Mconomic Slowdown Medium 5.25
Impacting business

Value
(Rs.crs)
0.35 Low Mxposures of all LOYs are monitored periodically
& forward covers are taken subject to Yoard
approval. Forex consultants are appointed to
manage the exposures.
0.15 Low Yuyers credit is availed on import purchases to
reduce interest cost, Mxisting requirements tied up,
Tata Power support taken in form of LC.
0.35 Low Price rise up to 5% is factored in the quotes.
Contingency is built at the time of offer. Yearly
contract with suppliers at fixed price is done for all
ongoing contracts& orders(Apr 09)
0.35 High Yack to back payment terms being negotiated with
vendors. Sticky receivables being rigorously
followed up by task team. Alternates like bill
discounting after credit period arranged to ensure
suppliers payment on due dates
High Address more on sectors with minimal impact e.g.
power, infrastructure. Increase value
add/relationship for generating revenue from
existing customers. Strategy plan exercise to
enhance product portfolio.
 Ratio Analysis
O! a      

Current Ratio 1.74 1.80 2.36 2.13 2.00 3.53

Quick Ratio 1.44 1.37 1.89 1.65 1.73 3.01

Ñebt to Mquity 3.68 3.67 4.17 4.08 3.97

Profitability Ratios 2009 2008 2007 2006 2005 Industry

Gross profit margin 36.56% 41.31% 53.21% 54.74% 47.13% 11.58%

Net profit margin 0.96% 2.25% 2.27% 2.65% 0.19% 1.86%
Return on assets 1.40% 2.26% 0.78% 1.71% 0.14% 1.33%
Return on equity 12.55% 18.12% 6.14% 13.63% 1.14% 2.26%
Operating margin 6.18% 9.14% 13.11% 13.16% 10.42% 2.55%
 Ratio Analysis
"##

a     

Average collection period(ÑSO) 137.60 171.43 475.25 264.58 193.42

Average payment period(ÑPO) 128.69 192.63 513.01 207.03 199.13

Age of inventory 34.86 59.63 209.30 92.74 87.31

ëa      

Ñebtors turnover 2.65 2.13 0.77 1.38 1.89 2.19

Inventory Turnover 10.47 6.12 1.74 3.94 4.18 2.05
Fixed assets turnover 15.33 9.13 3.06 5.58 7.29
Creditors turnover 2.84 1.89 0.71 1.76 1.83
 Hedging Instruments
‡ Options

‡ Futures contracts

‡ Forward contracts

‡ Swaps- Interest rate Swaps

Thank you