Foreign Currency hedging (Ankur Mishra)

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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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IIPM New Delhi


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IIPM New Delhi

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/


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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.

Foreign Currency hedging (Ankur Mishra)

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