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A REPORT
ON
Foreign Currency Hedging(A Finance Project)
BY
Ankur Mishra
D1012FWISBE-B10368-(LUK-4A-LA-3269)
INDIAN INSTITUTE OF PLANNING AND MANAGEMENT (IIPM)
NEW DELHI
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By
Ankur MishraD1012FWISBE-B10368-(LUK-4A-LA-3269)
A report submitted in partial fulfillment of the requirements of
MBA Program of
IIPM New Delhi
Distribution List:
Canon India Private Limited.
Sep 15, 2011
A REPORT
ON
Foreign Currency Hedging
(A Finance Project)
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Authorization
The report made on Foreign currency hedging was made in partial fulfillment of the
requirement of MBA Program of IIPM New Delhi. The report was made during the Summer
Internship Program at Canon India Pvt. Ltd. The report was authorized by the company guide
Mr. Puneet Nanda and faculty guide Prof. Ramakar Jha , IIPM New Delhi.
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Acknowledgements
I would like to express my sincere gratitude to CFO of Canon India Pvt. Ltd., Mr. Anuj
Aggarwal for providing me an opportunity to work on this project.
I am thankful to my Company Guide, Mr. Puneet Nanda, Senior Manager Finance and
Accounts, for not only providing me valuable guidance and support for project but also
providing me the required support with his extra ordinary knowledge of finance.
Prof. Ramakar Jha , Faculty, Department of Finance , IIPM New Delhi, my faculty guide,
with his continuous guidance throughout the program helped me to complete this project in a
timely and systematic manner.
I owe special thanks to Mr. Rishi-Bhandari, Manager-Finance and Accounts, And
Ms.Neelam-Mishra, Mr.Gourav-Babbar, Mr.Ankur-Sharma, Mr.Sudesh-Kumar,
Mr.Mohit-Verma Executive-finance And Accounts for his constant support and guidance
regarding the project. His inputs and suggestions have played a crucial role at every stage in the
development of the project. I would also like to express my gratitude to the finance team at
Canon India for constantly elucidating upon my repetitive queries.
Finally I would like to thanks to Canon India Pvt. Ltd. for providing me an opportunity togain hands-on experience by working in a corporate environment
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Executive Summary
I Ankur Mishra, Enroll No- D1012FWISBE-B10368-(LUK-4A-LA-3269) student of IIPM
New Delhi have done the project called Foreign Currency Hedging in my SIP at Canon
India Pvt. Ltd., 2nd Floor, Tower A&B, Cyber Greens, Gurgaon, Haryana. Canon operates
in photography and imaging products and offers high quality machines in this segment. In India
the competition in this segment is high due to the presence of various big players like Sony India,
Nikon India, HP and Xerox etc having sound technology and deep pockets. The market is
maturing fast and the demand for high precession products is increasing consistently with rapid
increase in customer base.
Canon India Pvt. Ltd. is a subsidiary of Canon Singapore Pte having 100% equity of the childcompany. The ultimate holding company is the Canon Inc based in Japan. Canon India is a net
importer of products from the parent company and thus is vulnerable to foreign currency risks.
The products are imported are mainly finished or are consumables in nature. The project helps to
analyze and reduce the risk of currency fluctuations in the market and minimize the impact on
the companys profitability.
Firstly, the project determines the feasible vehicle foreign currency to use for the trade based on
past fluctuations and then propose the best suited instrument to hedge the risk. It also brings out
the drawbacks of the current derivatives and strategy followed. The loss making contracts are
identified and the reasons for the losses are then looked into. Moreover it serves as the basis for
negotiations between the parent company and the Indian subsidiary. Canon uses forward
contracts as the main instrument to hedge. It hedges up to 50% of the monthly outstanding that
has been prescribed by the parent company and rolls over the remaining forex exposure to next
month. Canon India has a credit period of 120 days and uses it to fix the duration of the forward
contracts. The project proposes to use call option instead of forward contracts due to the
increased flexibility, profitability and limited risk. It also explores other instruments like Swaps,
futures, foreign debt etc but are ruled out because they are not feasible in case of Canon.
The report also covers a project on comparative analysis or benchmarking on the basis offinancial statements. The statements are analyzed on various ratios and parameters to do a year
on year analysis. Further the statements and parameters are compared with companies operating
in the same segments. This analysis serves as the basis to devise future strategy and identifies the
opportunities and threats for the company.
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Table of Contents
1. About the Company 81.1.Canon Inc. 8
1.2.Canon India Private Limited 8
Section A- Foreign Currency Hedging 9
2. Introduction 102.1.Summary 11
2.2.Objective of the Project 11
2.3.Scope of the Project 11
2.4.Methodology 11
2.5.Limitations 11
3. Main Text 123.1.The Derivatives Market 12-13
3.2.Hedging 13
3.3.Derivatives 14
3.3.1. Definition 143.3.2. Types 14-16
3.4.Canons Transactions 16
3.4.1. Companys Imports model 173.4.2. Foreign currency management 183.4.3. Guidelines by Parent Company 193.4.4. Limitations Imposed by Government 19
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4. Findings from the Study 204.1.Effect of currency fluctuations on profit and loss 20
4.2.Benefits on account of hedging 20
4.3.Alternatives available in derivatives 21
5. Illustrations 215.1. Currency Fluctuations & Charts 21-22
5.2. Canons Data 22
5.3. Pivot Table 235.4. Loss making contracts 23
Section B- Comparative Analysis/Benchmarking 24
1. Introduction 25
1.1 Description of the Project 25
1.2 Objective of the Project 25
1.3 Methodology 26
1.4 Limitations 26
2. Main Text 27
2.1Financial Statements 27-28
2.2Regulations and Laws 28
3. Findings from the Study 293.1 Expenses and Revenue analysis 29
3.2 Product portfolio and growth segments 29-30
3.3 Financial Parameters 30
References 31
Glossary 32
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1. About the company
1.1 Canon Inc.
Canon Inc. was found on 10, Aug, 1937 and is headquartered in Japan. Canon believes in thephilosophy of Kyosei which means Living and working together for the common good OR
All people, regardless of race, religion or culture, harmoniously living and working together into
the future .Canons corporate spirit, aims to set a global standard for advanced technologies and
service while becoming a criterion in the industry to which others will aspire. The Management
Philosophy is the excellent Global Corporation Plan which a medium-to-long-term management
initiative and is designed to make Canon a truly excellent company that is admired and respected
the world over. Through the plan, Canon aims to join the ranks of the world's top 100 companiesin terms of all major management indicators. Companies main activities can be divided into three
main segments i.e. Office Business Unit, Consumer Business Unit, Industry and Others Business
Unit. Currently it employees around 26,019 (as of Dec, 10) and has a consolidated sales of
2,317,043 million yen (2010).
Canon has its subsidiaries based across continents like America, Oceania, Middle East, Europe,
Asia, Africa, each having its own roles like Research and Development, Manufacturing
Facilities, Marketing and Sales etc.
1.2 Canon India Private Limited.
The Indian subsidiary Canon India Pvt. Ltd also known as CIPL was incorporated in 1997 and is
a 100% subsidiary of Canon Singapore Pte., a world leader in imaging technologies. Canon
today has offices spread across 7 cities in India with an employee strength of over 840 people
and markets 160 comprehensive ranges of sophisticated and contemporary digital imaging
products in the country. These include digital copiers, multi-functional peripherals, fax-
machines, inkjet and laser printers, scanners, All-in-ones, digital cameras, digital camcorders ,
dye sub photo printers and multi media projectors semiconductors, card printers & cable IDprinters.
Today, Canon India is certified for ISO 9001, ISO 14001 and OHSAS 18001. In 2006 and 2010,
the company was certified for its "Strong commitment to excel" at the CII-EXIM Business
Excellence Award.
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Section- A
Foreign Currency Hedging
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2. Introduction
The project, named Foreign Currency Hedging deals with the forex i.e. import and export
transactions of the company. The core of the project relates to analyzing the historical and
present forex transactions of the company, determining the effects of the fluctuations in the
market, tools i.e. derivatives used by the company and suggest with the optimum portfolio of
instruments with varying limits with respect to the total imports, So as to minimize the impact of
such fluctuations and reduce the losses.
In the beginning we would study the market fluctuations and the transactions the company does
in a financial year. The study would include the various hedging instruments used by the
company, the motive, terms and the parties involved, and the effect of these transactions on the
profit and loss of the company.
The project would further analyze the various instruments available in the Indian market used for
currency hedging. It will include the limitations imposed by the government on the private
companies in India as well as restrictions by the parent company.
Further the feasibility of the suggested alternatives or portfolios will be verified in terms of the
limitations, costs, risks, conditions of agreement etc. The above alternatives will then be checked
for the suitability according to the company.
2.1 Objective of the Project
The objective of this project is to analyze and reduce the risk of currency fluctuations in the
market and minimize the impact on the companys profitability.
This project will enable company to consider other derivative instruments available in India and
their combination i.e. their portfolio, in order to provide flexibility and profitability. The
company can also negotiate on the limitations enforced by the parent company.
This project will help the researcher gain a deeper understanding of the contracts i.e. forwardsentered by the company, the terms and conditions of the contract, parties involved. Also
researcher will gain knowledge about other derivatives like OPTIONS, SWAP, and FUTURES
etc.
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2.2 Scope of the Project
The scope of the project is limits to the import and export transactions involved with respect toproducts of the company which are imported from the parent company. The various derivative
instruments that are allowed in India by the regulators like SEBI and RBI are considered andother hybrid instruments are not considered. The company follows a debt free policy and that iswhy the foreign debt route is not considered. The company receives subsidies in foreign currencywhich is not hedged and left as exposure under the exports head, so the project does not considerthis head.
2.3 Methodology
1.Learn about the companys business model and factors affecting the decision in order to gaindeeper understanding like size of the company, liquidity, growth, profitability etc.
2. Understand the market fluctuations, export and import transactions, the activities of thevarious business partners and intermediaries like the custom authority, banks, customers etc.
3. Study the integrities of the type of instruments or derivatives used by the company and theterms, uses, costs, flexibility etc of the contract i.e. forwards, futures, options and swaps.
4. Study the impact and volume of such transactions on the profitability of the company and therisks associated with it and suggest the ways to reduce it. A suitable strategy is proposed that iscost effective and meets all the regulatory guidelines as well as provide suitable amount of cover.
2.4 Limitations
1. The market data is extracted from secondary data sources.
2. This is a suggestive report and the company has to comply with the restrictions enforced by
the parent company like hedging for only 50% of the total imports.
3. Moreover there are restrictions imposed by the government regarding the OTC (over the
counter) transactions by the private companies.
4. The strike price of previous years could not be obtained, so the inter-bank rate is used in case
of call options.
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3. Main Text
The project report involved a study of the import and export transactions of the company, various
derivative instruments and the regulations imposed by the Government of India and the parent
company.
A number of online articles, research papers and a lot of data obtained from the companys
sources and members were studied for the project report, a brief description of which is given
below.
3.1 The Derivatives Market: A Brief
HISTORICAL SYSTEM
Historically there was a fixed exchange rate system that was called the Bretton Woods system.
The prices were set by the respective governments. It was abolished in the year 1971 and market-
determined exchange rate regime was introduced. It was the volatility in the market due to
inflation and oil shocks that enabled the introduction of derivatives to manage risk.
PRESENT SYSTEM
The economic liberalization and globalization in the early nineties enabled the use of derivatives.
In the year 1993 flexible exchange rate system was adopted and in the year 1994 the Indian
National Rupee (INR) was made partially convertible on the current account. In the current
scenario the exchange rates system is not fixed and is determined by the forces of demand and
supply. The role of the respective governments has become more of a regulator rather than a
price setter. There are two types of market in India where these instruments can be traded i.e.
Exchange Traded (Market):- These represent the exchanges where these instruments can be
bought and sold. The have certain rules of trading and ensure no default risk. The instruments
traded are of standardized nature. In India basically they are traded on the Bombay Stock
Exchange (BSE) or the National Stock Exchange (NSE). The main traffic regarding the trading
is on NSE i.e. about 99% due to intermediaries like NCCL and NSDL.
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Over the Counter (OTC):- These are open markets where these contracts can be purchased or
sold. The parties involved can negotiate with each other in the market and terms are
customizable. In this market there is a risk of default on the part of each party. The RBI has put
certain restrictions on the OTC trade to malpractices followed by the parties.
MARKET REGULATOR AND LAWS
Securities Exchange Board of India (SEBI) is the market regulator in India governing the trade
of derivatives on the market and OTC in India. A separate derivatives cell, Advisory committee,
economic research wing has been setup within SEBI to ensure smooth trade. The clearing
corporation/House is responsible for the clearing and settlement of the trade. In Dec 1999 the
derivatives were included in the definition of the securities with an amendment in the Securities
Contract Regulation act (SCRA).The Reserve bank of India (RBI) manages the kind of players
that can participate in the market and also the roles they play.
PARTICIPANTS IN THE MARKET
The main categories or roles in which players operate in the market are given below:-
Hedgers: They use derivatives to mitigate the risk attached with the price of an asset. They try
to minimize the losses and do not make profits as the motive is not to speculate.
Speculators: They use derivatives to get an extra leverage in betting on future pricemovements in the price of an asset. They can make large profits or can make
huge losses.
Arbitrageurs: They take advantage of the price discrepancy between two different market and
book profits. In turn they help to maintain the balance between the markets.
There are various participants in the market like Foreign Institutional Investors (FII), private
banks, public banks (PSU), forex management agencies, authorized dealers etc.
3.2 Hedging: Definition
Hedging is used to mitigate or reduce the risk of fluctuations in the market in the underlying
asset i.e. currencies, stocks, commodities etc. It is basically a transfer of risk from one party to
another in return of some amount called premium. It can be achieved using various strategies but
is taking two equal and opposite positions in the cash and the future market. It also provides
protection against inflation by investing in higher return currencies, commodities, stocks etc.
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Basically, it is about taking a position where the investment is done to reduce the risk of adverse
price movements in the market.
3.3.1 Derivatives: Definition
Derivative is a security whose price is dependent upon or derived from one or more underlying
assets. It is a contract between two or more parties on the agreed terms and conditions. Its value
depends on the fluctuations in the underlying asset. The most common underlying assets
include stocks, bonds, commodities, currencies. Derivative means a forward, future, option, swap
or any other hybrid contract of fixed duration.
3.3.2 Derivatives: Types
The instruments vary in their use, flexibility, profitability, standardization and their market
where they are traded. In their very simple form they are called VANILLA OR PLAIN
VANILLA instruments where there are no special uses or clauses. The hybrid instruments are
called EXOTIC instruments which have additional features.
FORWARDS
A forward contract is a bi-party customized contract which is performed on a future date on the
terms and conditions decided when it is signed. It offers some amount of flexibility to the partiesbecause it is not a standardized form of an agreement and depends on the negotiating power of
the parties. Both the parties involved have an obligation to perform the contract according to the
contract. The contract can not be traded in the secondary market and needs to be performed at the
expiry. It suffers from poor liquidity and the parties can default. The price (premium) of the
contract depends on the parties involved and is not standard.
TOTAL BOOKING PRICE = CURRENT SPOT RATE + PREMIUM
FUTURES
A futures contract is much more organized, standardized compared to the forwards. They can be
traded in the secondary market i.e. exchanges like NSE, BSE. They are liquid in nature and can
be converted into cash easily. The parties involved are safe from a default risk because a clearing
corporation provides the settlement guarantee. They are also standardized in terms of delivery
and time of place.
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OPTIONS
An option contract is like an insurance against the fluctuations of the underlying asset in the
market. They are much more flexible and are liquid. The amount of premium paid in case of
options is more compared to the forwards due to the additional flexibility and reduced obligation
provided in the contract. They are much more standardized. They are of two types:-
CALL option: They are contracts to buy an underlying asset from the market. They
provide the right to the buyer and not the obligation of the contract to buy
an underlying asset in the pre-specified quantity. The seller has anobligation to sell the asset to the buyer. The seller charges an amount from
the buyer called premium against the risk cover.
PUT option: They are contracts to sell an underlying asset from the market. They
provide the right to the seller and not the obligation of the contract to sell
an underlying asset in the pre-specified quantity. The buyer has an
obligation to purchase the asset from the seller. The buyer charges an
amount from the buyer called premium against the risk cover.
Options can be done in two ways i.e. the European Style OR the American Style. In the
European style the contract is to be performed at the maturity date whereas in American style the
contract provides a flexibility of performing it before the maturity date as well.
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SWAPS
A swap contract is a bi-party contract to exchange the future cash flows on the pre-determined
basis or formula. They are of two types:
Interest rate Swap: They are contracts to swap or exchange only the cash flows arising
out of interest on the underlying asset, between the parties.
Currency Swap: They are contracts to swap or exchange both the principal and the
interest related cash flows each in different currency between the parties.
There are various other hybrid instruments available in the market which is beyond the scope of
the project.
3.4 Canons Transactions
CIPL is into Marketing, Sales and Service of the imaging products, business solution etc in
India. Its major imports and exports are from/to the parent company i.e. Canon Singapore Pte..
The products imported are of all the three categories in which the parent company operates.
These are of every kind like finished goods, spares, consumables, fixed assets (machinery) etc.
The company can even bring these items to their warehouse or they can ship those items directlyto the customer from the port. In case the customer takes the item form the port then he has to
pay the custom duty and can latter get it reimbursed from the company. The company also
exports the software which either built or purchased by them to the parent company. The
softwares (Drivers, troubleshooters etc) are meant to support the hardware products. The
company payments are carried out in US Dollars. The credit period for the company is 130 days.
The child company also receives subsidies for sales promotion, promo items of the products and
which are not meant for sale and thus does not get custom duty levied on them. The working
model of the transactions is shown below.
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3.4.1 Import - model
FOB Value (US $) CIF+1% = Assessable Value (US $)
Shipments
BOE Generated Custom Duty
Purchase Order (BCD)
Payment (INR)
Landed Cost
Item Transfer
Import Transaction involving various Documents and costs involved at each stage
Canon Singapore Pte.
(EXPORTER)
Custom
Authority
Duty
Clearance
Canon India Pvt. Ltd.
(IMPORTER)
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First of all the child company CIPL (Importer) raises a purchase order (PO) on the parent
company Canon Singapore Pte (Exporter). Then the products are shipped to the child company at
a base price (Free On board Value) on which the freight (2%) and insurance (1%) is charged.
Thus the CIF (Cost, Insurance and freight) value is calculated and on the basis a 1% cost is
added to get the assessable value (AV).Based on this assessable value the custom duty is
calculated and levied, if the items are not exempted under the customs law. Then the Bill Of
Entry (BOE) is generated having the record of all the items imported and a clearing of all the
items are given by the custom authority to verify, if the duty has been paid or not. Then the items
are brought to the warehouse and sold on the basis of sales orders (SO).The final cost at the
company warehouse is called the landed cost. The company then adds a markup on the item to
get an (maximum retail price) MRP and distributes in the market.
3.4.1 Foreign currency management
The company imports the items from the parent company and makes the payments in US$. It is
therefore, subject to foreign currency fluctuations. This affects the profit and loss of the company
due to the exposure i.e. the amount or cash flows that are not certain and are in the future, thesedepend on the spot rates of the currency at that point if time. The company has to bear the dual
risk of fluctuations with respect to custom rates and spot rates. The profit and loss is booked with
respect to the custom rates and entered into books and financial statements and the difference
between the custom rates and total booking price. At the end of every month closing is done and
outstanding monthly payment is calculated. The hedging is done on the 50% amount of this
monthly outstanding. The company basically enters into forwards only with private banks and
does not do open hedging. The scheduling of the forwards maturity is done on the basis of the
payment date. The rest of payment is outstanding and is rolled over to the next month. Then the
next months imports are added to the payment outstanding from the previous month and again
50% of this total amount is hedged.
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3.4.3Guidelines by the Parent Company
The following guidelines are being imposed by the parent company:-
1. The child company is limited to only 50% hedging of the outstanding amount at any point of
time by the parent companys limitations.
2. It can also, only enter into plain vanilla forward contracts with the banks.
3. The company does not enter into any other hybrid derivative instruments.
4. Hedging should be done for the hedging purpose and not for speculative purposes.
5. The company follows a debt free policy and has raised all the funds through equity.
3.4.4 Limitation Imposed by the Government
The companies in India can only use derivatives only for the hedging purpose and not on the
speculative uses. There are restrictions also on the OTC market in India. RBI guidelines are there
in place to limit the kind of players that can trade in the market by using eligibility criterion
based on the past performance. In case of open hedging the company can hedge up to a certainlimit of their projections or budget and that is based on the past performance of the company but
there is no such limit in case if the company has an exposure. In case of small and medium
enterprises they can only enter into forwards with banks from which they are availing a credit
facility.
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4. Findings from the study
4.1 Effect of currency fluctuations on profit and loss
The company is directly affected by the currency fluctuations in the market and records profit
and loss in the books of accounts. The value of the firms operating cash flows, competitive
position, income statement, market share and the stock price are all sensitive to these
fluctuations. It also affects the balance sheet of the company by changing the value of assets andliabilities of the company i.e. accounts receivable, accounts payable, inventory, foreign currency
debts and investments. Based on the past years data the company has been following a cyclical
pattern where in one year they make profit and in other they make loss. The losses in the times of
recession were huge due to high volatility and had dented the companys profits. The company is
making losses on contracts which are of large duration or of high amount.
4.2 Benefits on account of hedging
First of all in the project the researcher was able to choose the suitable currency for the foreign
transactions i.e. between US $ and Japanese yen (JPY) because JPY has a higher volatility as
compared to US$. Currency chosen was based on the analysis of past years spot rates of both the
currencies. Hedging helps us to minimize our losses and manage the exposure which the
company has in the market. In case of forwards there is less flexibility but still the seller has the
obligation to perform the contract and if the custom rate is higher than the booking price then the
company makes a profit. In the case of much more flexible derivative like an American style
option the loses are minimized to the extent of premium paid to purchase the plain vanilla call
option if the spot rate is lower than the booking price but the profit is unlimited, if the spot rate ishigher than the booking price.
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4.3 Alternatives available in derivatives
There are various other alternatives available in the market like futures and swaps. They can
provide further benefits in terms of the risk cover against the currency fluctuations. In case of
futures they are less costly than options and provide more liquidity than the forwards in which
the company is currently dealing because they can be traded at the exchange. They can use
swaps in case of foreign currency debt or investments because they are most suitable where
interest payments are involved. The company can also use a straddle strategy where they can
purchase equal amount of call and put option to get a cover against fluctuation in any direction of
market fluctuation. The company can also go for a foreign debt where it automatically gets the
advantages of the market counter effect and the effect of volatility is nullified.
5. Illustrations
5.1. Currency Fluctuations & Chart
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5.2. Canons Data
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5.3. Pivot Table
5.4. Loss making contracts
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Section- B
Comparative
Analysis/Benchmarking
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1. Introduction
The project named Comparative Analysis deals with the analysis and interpretation of the
financial statements of the companies in the same market or product segment. This is used to
gauge the current position of the company in the market, growing segment, declining segment,
various ratios etc. It enables the company to take corrective actions and helps them
achieve/maintain a position of market leader in every segment.
In the beginning the financial statements of the companies are summarized and converted into a
single representation format in order to facilitate meaningful comparison i.e. the accounting
heads are matched so that the financial statement of each company represents the same
information.
The project would further analyze the financial statements on various parameters, ratios and
would draw charts representing revenue breakup in terms of products and market segment. This
would include both the aspects i.e. income and expenditures of the financial statement. Also
industry averages or trends are looked into.
Further the project would suggest the corrective measures and the growth potential in each
segment, also the position of competing firms can be analyzed. Further the strategies would be
devised and analyzed in terms of their feasibility.
Objective of the Project
The objective of the project is to look into the financial statements and markets to devise a
feasible strategy which can address the declining segments and grow in the potential segment.
This is done in order to achieve a position of leader in each and every segment and focus on the
optimum product portfolio.
The company can look at the performance of the competitors and can gain a deeper
understanding of their revenues, margin, expenses etc. This will serve as the basis of future
projections and planning.
This project will help the researcher gain a better idea of the various parameters used by the
companies to analyze their past performance and build up strategies. The project also enabled the
researcher to look at financial statements and their regulatory compliances. It also helps to learn
new terminologies like impairment loss, deferred assets, leases, actuarial etc.
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Methodology
1. Understanding the financial statements of the company and the competitors and looking atvarious accounting heads and feeding into the system.
2. Converting the format of financial statements into a single format for analysis andunderstanding the various accounting standards involved.
3. Deriving various parameters and financial ratios for all the companies and collecting marketdata from secondary sources. The project then Compares the companies on the basis of theparameters derived and looks at the potential competition in the market.
4. Breaking-up and analyzing the companys data according to product categories and segments
and then working out a suitable strategy in order to address the issues identified in theanalysis.
Limitations of the Project
1. The market data is extracted from secondary data sources.
2. The competitors had taken exemptions from the regulators, not to disclose data under schedule
VI which is product category wise revenue.
3. Assumptions were taken in order to covert financial statements of all the companies in the
same format for analysis.
4. The data was of confidential nature and thus it is not possible to provide the data or its analysis
with this project.
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2. Main Text
The project report involved a study of the financial statement of the company and its
competitors, various ratios, parameters and charts that are used for analysis of the performance.
It is basically performing a financial analysis and comparing the results in order to assess the
overall competitiveness and productivity.
A number of articles, research papers and a lot of data obtained from the companys sources and
members were studied for the project report, a brief description of which is given below.
2.1 Financial Statements
The financial statements are the formal records of the financial activities of a company. It
includes the Balance Sheet, Profit and Loss and Cash Flow Statement of the company. These
reports show the companys previous years performance and serves as the key input for the
analysis and comparisons.
Balance sheet is a summary of the financial condition of the company. It is a stock concept and
is considered as on date position. It basically contains two heads having the Sources of funds
(Liabilities) and Application of funds (Assets). In India it is made on the basis of the financial
year i.e. 1April to 31March.Outside India balance sheet is made on the basis of calendar year.
Canon prepares its balance according to both the formats i.e. one for the taxation and fillingpurpose in India and other for the parent or holding company, in order to help them publish a
consolidated balance sheet.
Profit and Loss statement also called the income statement summarizes the financial activities of
a particular year. It is a flow concept and shows the position of a company during the year. It
contains two basic heads i.e. Income and Expenditure and is a basis for the calculation of
EBIT (Earning before interest and taxes), PAT (Profit after tax), EPS (Earning per share) etc.
Canon prepares P&L for both the calendar year and the financial year.
Cash Flow statement shows the flow of cash in and out of the business and serves as the basis
for obtaining parameters like liquidity and profitability. It has basically three heads in which the
transactions are categorized i.e. Operating activities, Financing activities and Investing
activities.
The financial statements are consolidated record and the details pertaining to each record are
being shown with the help of Schedules or Notes to accounts. It contains all the heads under
which the transactions are classified and the amounts corresponding to it. It also shows the
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methodology followed by the company for the preparation of the records and is in conformance
with the regulatory laws and accounting standards.
Accounting standards serves as the basis of preparing the financial statements and are theoretical
concepts in it. The methodologies followed by the company vary country to country and these
standards provide a method to ensure regulatory compliance.
2.2 Regulations and laws
The company has to comply with various guidelines that has been prescribed by the MCA
(ministry of corporate affairs).The following are the kind of audits that are performed within the
company:-
1. Statutory Audit: The main purpose of this audit is to ensure that the financial statementsgive true and fair view and are free from any material misstatements. The agency that
performs the audit is a registered firm and is external to the company. The audit is
performed according to the calendar year. Canon India Pvt. Ltd. Get its statutory audit
done by S. R. Batliboi & Associates.
2. Internal Audit: The purpose of conducting an internal audit is to ensure that theorganization adds value and improve its operation. The internal audit is audit is
performed throughout the year and the report is attached with the statutory audit report.
This audit is performed according to a calendar year Canon India Pvt. Ltd. Get its internal
audit done by Sahni Natarajan & Bahl.
3. Tax Audit: This audit is performed under the sec-44AB of the Income-tax act 1961.Companies having a turnover of above 60 lacs are required to undergo this audit. Canon
gets its tax audit done by S. R. Batliboi & Associates.
The company further complies with the regulations by the Companies Act 1956, MSMED
(Micro, Small and Medium Enterprises) Act 2006.
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3. Findings from the study
3.1 Expenses and Revenue analysis
The company is into an expansionary phase with all its income ploughed back into the system
and a large increase in the investment by the parent company through equities route. The
company invests a good amount in their employees and that results in low attrition and reduced
recruitment expenditure as compared to other companies. Canon has also invested a large
amount in the advertising and sales as compared to their revenue base and only Sonys
expenditure is comparable in this segment. Canons majorchunk of revenue comes from digitalcamera segment and revenues recorded a growth of nearly 45% last year. The company follows a
debt free policy and thus has no expenditure on interest whereas other companies have such type
of expenditures. Besides imaging products the company also gets a part of revenue through in
house software development which is exported to the parent company. The parent company also
extends subsidies to Canon India. The company charges impairment losses in case if the assets
useful life is reduced or it depreciates much faster than anticipated. In the operating expenses
segment the company quite efficient and the major head is the rent expenses paid for the
buildings.
3.2 Product portfolio and growth segments
The companys revenue is broken down and analyzed into various product segments like digital
cameras, printers, copiers, scanner, spares and consumables and services etc. The performance is
then compared with the competitors in each segment. The main competition in the digital camera
is from Sony and Nikon, in the printers, copiers and scanners is Xerox and HP and in other
categories all firms are competing. Next major contributors to the revenue are printer and
photocopier segments. The growth in the printer segment has been the highest followed by the
digital camera segment. The company has seen a negative growth in the copier segment but that
is attributed mainly to the financial slowdown because this is a business segment product but the
potential in this category is huge as the companies are picking up and Canon is the market leader
distantly followed by Xerox. Xerox has its major revenues from the spares and consumables
segment, it sells huge steam paper rolls that are used in high end printing. Hp has its major
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revenue from other products like big storage devices and servers and after that from the printers
segment. CIPL is entering into the retail segment as well by collaborating with business partners
and opening exclusive canon stores on a huge basis across different cities in the country. Thecompany has a clear technological edge over other companies when it comes to high precession
lenses for the SLR (Single lens reflex) and the DSLR (Digital single lens reflex) cameras that are
used by professional photographers worldwide. The company also sees a decent demand in the
camera accessories segment like cases, tripod, lenses, storage cards, batteries etc. The company
has also seen demand in the lease category as no other major company provides business
machines on contracts.
3.3 Financial Parameters
The company is getting business and is generating profits as the ratios like ROA (Return on
assets) and ROCE (return on capital employed) healthy and are comparable to the bigger
competitors like Sony and HP. It has a healthy turnover of more that 1000crore in a calendar
year. The company has good relations with the creditors and enjoys a good period to pay them
which is higher as compared to other players. Also the credit limit by the parent company has
been revised to 120 days. The company is efficient as the cash conversion cycle (days) is low
and the inventory is getting converted to cash much faster. The company is focusing to reduce
the inventory so as to cut down on the costs. The company maintains a healthy revenue margin
so as to ensure that the profitability remains satisfactory and it can absorb any marketfluctuations which is also shown by the net profit margin. The company has enough liquidity in
order make immediate commitments and invest into short term instruments like bank fixed
deposits which are of safe nature and gives fixed return. The EPS (Earning per share) has
increased considerably in the past year and the company has recovered from the recessionary
phase quite quickly. The nature of current assets is of high quality (Debtors) and it faces a very
less risk of payment defaults as the bad-debts of the company are low as compared to the
turnover.
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References
1. Available from:http://www.canon.com2. http://www.canon.co.in3. Derivative Instruments,http://www.investopedia.com4. http://www.sebi.gov.in5. http://www.derivativesindia.com/scripts/index.asp6. http://www.emecklai.com7. http://www.newyorkfed.org/research/economists/sarkar/derivatives_in_india.pdf8. http://www.rbi.org9. http://www.bloomberg.com10.http://www.moneycontrol.com11.http://www.nseindia.com12.http://www.derivatives.com13.http://www.mca.gov.in14.
http://www.thomsonreuters.com
http://www.canon.com/http://www.canon.com/http://www.canon.com/http://www.canon.co.in/http://www.canon.co.in/http://www.investopedia.com/http://www.investopedia.com/http://www.investopedia.com/http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.derivativesindia.com/scripts/index.asphttp://www.derivativesindia.com/scripts/index.asphttp://www.emecklai.com/http://www.emecklai.com/http://www.newyorkfed.org/research/economists/sarkar/derivatives_in_india.pdfhttp://www.newyorkfed.org/research/economists/sarkar/derivatives_in_india.pdfhttp://www.rbi.org/http://www.rbi.org/http://www.bloomberg.com/http://www.bloomberg.com/http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.nseindia.com/http://www.nseindia.com/http://www.nseindia.com/http://www.derivatives.com/http://www.derivatives.com/http://www.derivatives.com/http://www.mca.gov.in/http://www.mca.gov.in/http://www.mca.gov.in/http://www.thomsonreuters.com/http://www.thomsonreuters.com/http://www.thomsonreuters.com/http://www.thomsonreuters.com/http://www.mca.gov.in/http://www.derivatives.com/http://www.nseindia.com/http://www.moneycontrol.com/http://www.bloomberg.com/http://www.rbi.org/http://www.newyorkfed.org/research/economists/sarkar/derivatives_in_india.pdfhttp://www.emecklai.com/http://www.derivativesindia.com/scripts/index.asphttp://www.sebi.gov.in/http://www.investopedia.com/http://www.canon.co.in/http://www.canon.com/7/31/2019 Foreign Currency hedging (Ankur Mishra)
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Glossary
In-the-money: A derivative (call option) is called in the money when the strike price is less than
the spot rate and vice versa in case of put option.
At-the-money: A derivative (call/put option) is called in the money when the strike price is
equal to the spot rate.
Out-of-money: A derivative (call option) is called in the money when the strike price is greater
than the spot rate and vice versa in put option.
Strike Price: It is the price at which the deal is entered into by both the parties.
Premium: It is the premium charged by the party who provides the hedge. Usually they are
private and public banks.
Booking Price: It is the total price for a derivative i.e. spot rate and the premium that needs to be
paid by the buyer.
Spot Rate: It is the current price of the underlying asset prevailing in the market.
Custom Exchange Rate: Rate of exchange of conversion of foreign currency into Indiancurrency or vice versa published by Central Board of Excise and
Customs on monthly basis. And the same should be taken into
account in books of accounts for booking restatement profit and
losses.
IBR/Reference Rate: It is the inter bank rate at which banks lend/buy to/from each other.
Exposure: It is the un-hedged amount or cash flow whose value is not certain and is dependent
on the exchange rate.
Plain vanilla:This kind of derivative is in its very basic form and have no additional flavors or
features attached to it.
Exotic: These are instruments having additional features attached to it compared to the plain
vanilla and are hybrids.