It is interesting to study the companies which are leaders in their fields. One such company which often comes up on screens is Himatsingka Seide Ltd.
CRISIL's report describes them the best:
The Himatsingka group has been a leading manufacturer and the largest exporter of silk and silk-blended drapery and upholstery fabrics in India for the past eight years. The group, backed by its team of designers in India, the US, and Europe, offers more than 10,000 products, and can create 1500 products annually. It has further established itself in the home textiles segment, where it was already present with high-end drapery and upholstery products, through its bed linen business. The bed linen operations, which are fully integrated with a manufacturing unit at Hassan (Karnataka), three acquired global distribution companies, and a retail arm with 14 stores, account for about 90 per cent of the Himatsingka group’s total revenues.
The exciting thing about the company is its market capitalization of just 273 crores. The top-line and EBIDT levels have been pretty strong in comparison to the valuations.
In 2006, the company raised money through GDRs and the net worth stood at around 600 crores (and has stayed at around same levels until 2013). Since then, the company has done aggressive overseas acquisitions which tightly integrates with the company's production. This has led to the creation of 532 crores of (intangible) goodwill in the balance sheet.
The real problem has been the derivate losses on the company's foreign currency contracts. In 2009, the company posted a loss of 74 crores.
(Extract from the 2009 annual report)
The financial performance during the year has been primarily impacted by a Rs. 43 crore loss attributable to closure / provisioning on account of foreign exchange derivative contracts, a Rs 18 crore loss incurred on account of foreign exchange translation/realization and a loss of Rs. 15 crore on account of the stabilization of the Bed Linen plant in the first half of the financial year.
I am not sure whether the loss was a one time item or can repeat again (considering there is again a similar volatility in exchange rates). There is still a foreign currency loan of $136 lacs, hedging contracts outstanding of more than $200 lacs and a little extra-volatility can take the bottom-line in any direction. As there are far too many components involved, I convinced myself to watch this stock only from a distance, even though it looked very attractive.
I still wanted to know why the losses occurred and how does accounting work in foreign exchange contracts. 2008's dollar vs rupee chart told a part of the story and this article provided a good commentary. But the real gem was this article by Dolphy D'Souza which explained the hedge accounting, knock-in & knockouts and the role of Swiss Franc.
