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ASSIGNMENT

Banbury Impex (India) P Ltd



As November 2010 came to a close, CEO Aadesh Lapura of Banbury Impex Private Limited,
a textile company in India, sat in his office in solitude looking over his company's financial
statements. It looked like 2010 would close with a small growth in sales and a small drop in
profits. Although Banburys profits were positive, the prospects of about 1.5% return on sales
were simply not good enough moving forward.
He now had two problems: a short-term prospective sale to a Turkish company, and a larger,
long-term problem, of increasing his overall profitability.
Lapura concluded that overall profitability or lack thereof was a result of two price forces.
The first was the rapid rise in the price of cotton. A major cost driver in the
textiles industry, cotton prices had risen dramatically in 2010.
The second issue was clearly the current (Nov2010) rising value of the Indian
rupee (INR) against the U.S. dollar (USD). Banburys sales were all invoiced
in U.S. dollars, and the dollar was falling. Profit margins were down, and he
needed to move quickly.
Founded in 1997, Banbury Impex Private Ltd. was a family owned enterprise that
manufactured and exported apparel fabrics. The company expected sales close to INR 25.6
crores/INR256 Million or USD 5.4 million in 2010 as illustrated in Exhibit 1.
Exhibit 1



Rising raw material and labor costs. The chief raw materials used in textiles were cotton
and other natural and poly based yarn.
Erratic monsoons, coupled with increased exports of cotton in the recent years,
had caused the price of cotton to rise dramatically.
During the past 12 months cotton prices had increased more than 75%.
A variety of India Govts programs and restrictions had also contributed to a
growing scarcity of skilled labor in the textile industry.
Competition from China and other Asian countries. India and China account for the
majority of global textile production.
Due to low labor costs and strong government support and infrastructure,
China had been able to stay ahead in competing with the BRIC (Brazil,
Russia, India, and China) countries.
As a consequence Chinese textile products were priced more competitively in
the global market, and prevented Indian companies from pushing through any
price increases.
Indian companies were now suffering falling margins and losing orders to
other countries. Much of the Indian low value market had already shifted to
Bangladesh as costs there were 50% cheaper than in India.
Appreciation of the Rupee. The rupee had grown increasingly volatile during that time
against the dollar, and over the past two years ended Nov 2010, appreciated by nearly 20%.
This appreciation had made countries like Bangladesh and Vietnam more
competitive on the global front. In early November2010 the rupee had risen
to INR 44/USD, the strongest in more than three years. It then hovered at 45
(Nov.2010).
Further strengthening of the rupee against the dollar would most likely put
many Indian textile companies out of business.
Cotton Futures. Lapura was considering the use of cotton futures, a practice some of his
competitors were already using.
A recent check of futures prices had provided him some data on what prices he
may be able to lock in now for cotton in the coming year, in U.S. cents per
pound(lb): March 2011: 113.09; July 2011: 102.06; October 2011: 95.03.
Although futures would eliminate the risk of further increases in cotton prices,
he was still afraid he would be locking in the price when at the top.
Currency of Invoice. As an Indian textile exporter, Lapura had never really had any choice
about the currency of invoice it would be the U.S. dollar. But maybe times had changed?
The dollar had been falling against the rupee for some time then, and as a
result, the rupees generated from export sales were less and less.
The problem was that as an exporter from what the world called an emerging
market, his hard currency choices were the U.S. dollar, the European euro,
and the Japanese yen. And the rupee had been strengthening against all of
them during that period!
EXHIBIT 2 Curious Case of Rising Cotton Prices

EXHIBIT 3 Indian Rupee/U.S. Dollar Spot Rate

Turkish Exposure. Lapuras immediate problem was a $250,000 textile sale he had just
made to a Turkish customer.
The contract allowed him to change the currency of invoice from the Turkish
lira to the dollar or euro if he wished, but he had to decide by close of business
on the date of sale to Turkish Customer.
Expected settlement on the invoice was January 30, 2011. But regardless of
which currency he chose (the rupee not being one of the choices), he still had
to decide how to hedge it.
Forward Rates. Lapura had collected a variety of forward rates from his local bank for the
dollar, euro, and Turkish lira, as listed in Exhibit 4. He eyed the dollar quotes the closest. The
forwards would lock him into a rupee rate which was slightly better than the current spot rate.
Of course if the forwards were considered indicators of likely rate movement, they did
indicate what he had long hoped for a rise in the dollar.
Forward Rate Quotes Exhibit 4

Money Market Hedge. He had also considered some form of money market hedge
borrowing Turkish lira against the receivable.
Although he had been selling in Turkey for over five years, he had
never borrowed there, and only had one bank relationship in
Ankara,Turkey.
If he provided sales history to the Turkish bank, he may be able to
use his $250,000 receivable as collateral. Domestic loan rates in
Turkey for companies with similar credit quality were about 14%
according to his bankers.
But his bankers also told him that as a small foreign business, the
Turkish market would charge him an additional 300 basis point credit
spread. But if he did indeed get the money sooner rather than later,
domestic Indian deposit rates were averaging a healthy 10.4%.
Currency options had recently become a hedging alternative in India. The NSE of India in
Mumbai had opened a currency options market in October 2010.
With no experience with options, Lapura wondered if an option
would provide better protection than a forward contract. The options
market, that time, was limited to INR/USD options.
Although Mr. Lapura could see the upside potential that an options contract might provide, he
wondered how much the contract would hurt his slim margins if he had to exercise his
contract.

Currency Option Quotes on the USD


Decision Time
A. Aadesh Lapura picked up his notes and knew it was time to call a family meeting.
Times were tough and the family's livelihood was being threatened.
B. Two things needed to be sorted out and quickly.
With the last major sale of 2010 on the books the Turkish sale,
he knew he needed to protect the value of this sale from currency
losses.
Secondly, he needed to find a sustainable path to protecting the
business over the long term. With India's continued economic
growth, many analysts are forecasting, during that period, a
stronger Indian Rupee vs USD exchange rate into the foreseeable
future.
C. Competition was fierce. Lapura wondered how much longer his Indian operations
the livelihood of the family would be profitable.

REQUIRED:

1. Which factor do you think is more threatening to Banburys
profitability, cotton prices or the rising value of the rupee?
2. Do you believe Lapura should hedge his cotton costs with cotton
futures? What would you recommend?
3. Which currency of invoice do you think Lapura should choose for the
Turkish sale?
4. What recommendation would you make in terms of hedging the
Turkish sale receipts?

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