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Wrong forex calls pull Mastek Q4 profit down to Rs 3 crore
July, 22nd 2010

A shocked Mastek management termed the June 2010 quarter as most disappointing, with net profit slipping into single digits. As some of its forex hedges went wrong in an already weak quarter, the companys net profit crashed to Rs 2.5 crore from Rs 35 crore in the year-ago period.

A majority of the forex losses, however, are mark-to-market losses holding out hope that they may get reversed in the next quarter if the rupee appreciates. The company has stopped giving guidance from this quarter onwards.

Mastek met the upper end of its revenue guidance for the June quarter at Rs 165 crore, but faltered in meeting its net profit guidance primarily because of the Rs 5 crore forex loss. It was one of the worst years for Mastek, said Sudhakar Ram, chairman and group CEO.

Masteks fiscal year ends in June. For the full year, the company had a net profit of Rs 68 crore on a revenue of Rs 722 crore as compared to Rs 141 crore and Rs 965 crore, respectively in FY09. Shares of Mastek ended flat on BSE on Thursday at Rs 295.50.

The reason for the forex losses are because of a long-term four-year hedge the company has taken on one of its large contracts. Typically, Mastek is conservative in its forward contracts, hedging only 50% of its net forex recievables.

In this case, however, it hedged its entire recievables because it wanted to protect its rate on the contract and take advantage of the appreciating trend in the rupee. Unluckily for the company, the rupee depreciated and it was forced to take a mark-to-market loss. Last quarter, it had benifitted from a forex gain of around Rs 2.6 crore.

As of June 30, it has outstanding forex hedges of $55 million, of which $45 million are long term. We benefitted in revenue terms because of the depreciation in the rupee but took a hit on net profit.

A significant part of the forex losses are mark-to-market, said Farid Kazani, CFO, Mastek. Apart from the forex loss, the company also incurred travel-related expenses because of the volcanic ash eruptions that disrupted air travel during the quarter. Ramp down in its British Telecom-NHS project also pulled down revenues.

The company announced a win for its insurance solution, Elixir, in North America, a key market for IT solutions and services, and its 12-month order book expanded to Rs 306 crore.

However, it did not give a guidance for the September quarter. Given that a certain degree of uncertainty persists within the macro and demand environments, the company is discontinuing its practice of sharing quantitative outlook, it said.

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