FAS C2

International Finance Project

Sachin Sebastian 18B124

Jyoti Gupta 18B114
Kartik J 18B115
Gaurav Patole 18B109
Vinay Ram 18B140
About the Company

Lupin was founded in 1968 by Desh Bandhu Gupta, an Associate Professor at BITS-Pilani, Rajasthan.
Lupin gained recognition first when it became one of the world’s largest manufacturers
of tuberculosis drugs. Today, the company has a very high market share in key markets in
the cardiovascular (prils and statins), paediatrics, Diabetology , GI, anti-infectives , CNS and NSAIDs
therapy segments. It also has a global leadership position in the anti-TB and Cephalosporin segments.

Lupin’s research into advanced drug delivery systems resulted in the development of technologies
which helped to develop value-added generic pharmaceuticals. Its manufacturing facilities, spread
across India and Japan, played a critical role in enabling the company fulfil its global aspirations. Their
facilities are of international standards and approved by international regulatory agencies like the US
FDA, UK MHRA, Japan’s MHLW.
Lupin is the 4th largest pharmaceutical player in the US by prescriptions (IQVIA NPA, March 2018). In
the last five years, Lupin has made significant investments in the US-based R& D infrastructure and
manufacturing facilities.

Risks, Concerns & Threats

The last financial year witnessed huge volatility in global markets including commodity prices and
foreign currencies. This was further aggravated by the disruptive changes in the largest market, the
United States and also the increased scrutiny over drug pricing. In this domestic market, disruption
continued in the form of GST implementation and expansion of span of price controls. Also, stringent
environmental control measures were undertaken by China, who are a key source of raw material and
intermediates for the Pharma industry. This has increased pressures on input cost. But due to Lupin's
formidable structure and forecasting framework, they were able to manage competitive, economic,
financial, geo-political and social risks.

Hedge Accounting

The Group uses foreign currency forward contracts to hedge its risks associated with foreign currency
fluctuations relating to highly probable forecast transactions. The Group designates such forward
contracts in a cash flow hedging relationship by applying the hedge accounting principles. The forward
contracts are supposed to be stated at fair value at each reporting date and changes in the fair value
of these forward contracts that are designated and effective as hedges of future cash flows are
recognised directly in Other Comprehensive Income (‘OCI’) and accumulated in “Cash Flow Hedge
Reserve Account” under Reserves and Surplus, net of applicable deferred income taxes and the
ineffective portion is recognised immediately in the Consolidated Statement of Profit and Loss.
Amounts accumulated in the “Cash Flow Hedge Reserve Account” are reclassified to the Consolidated
Statement of Profit and Loss in the same period during which the forecasted transaction affects
Consolidated Statement of Profit and Loss. Hedge accounting is discontinued when the hedging
instrument expired or no longer qualifies for hedge accounting. For forecasted transactions, any
cumulative gain or loss on the hedging instrument recognised in “Cash Flow Hedge Reserve Account”
is retained until the forecasted transaction occurs. If the forecasted transaction is no longer expected
to occur, the net cumulative gain or loss recognised in “Cash Flow Hedge Reserve Account” is
immediately transferred to the Consolidated Statement of Profit and Loss.

Currency risk

The Group is exposed to currency risk on account of its operations in other countries. The functional
currency of the Group is Indian Rupee. The exchange rate between the Indian rupee and foreign
currencies has changed substantially in recent periods and may continue to fluctuate in the future.
Consequently, the Group uses both derivative instruments, i.e., foreign exchange forward contracts
to mitigate the risk of changes in foreign currency exchange rates in respect of its highly probable
forecasted transactions and recognized assets and liabilities.

The Group enters into foreign currency forward contracts which are not intended for trading or
speculative purposes but for hedge purposes to establish the amount of reporting currency required
or available at the settlement date of certain payables/receivables.

The Group also enters into derivative contracts in order to hedge and manage its foreign currency
exposures towards future export earnings. Such derivatives contracts are entered into by the Group
for hedging purposes only, and are accordingly classified as cash flow hedge.

Exposure to Currency risk

Following is the currency profile of non-derivative financial assets and financial liabilities:
Sensitivity analysis

A reasonably possible strengthening (weakening) of the Indian Rupee against US dollars at March 31
would affect the measurement of financial instruments denominated in US dollars and affected equity
and profit or loss by a certain amount. This is based on the assumption that other variables like interest
rates remain constant and also ignores any impact on the forecast sales and purchases. The analysis
is given below.

Effects of Hedge Accounting

The Company’s risk management policy is to hedge above 15% of its estimated net foreign currency
exposure in respect of highly probable forecast sales over the following 12-18 months at any point in
time. To hedge its currency risk, company uses forward exchange contracts to. These contracts are
generally abbreviated as cash flow hedges.

The forward exchange forward contracts are denominated in the same currency as the highly probable
forecast sales, therefore the hedge ratio is 1:1. Most of these contracts have a maturity of 12-18
months from the reporting date. The Company’s policy is for the critical terms of the forward exchange
contracts to align with the hedged item.

The Company determines the existence of an economic relationship between the hedging instrument
and hedged item based on the currency, amount and timing of their respective cash flows. The
Company assesses whether the derivative designated in each hedging relationship is expected to be
and has been effective in offsetting changes in the cash flows of the hedged item using the
hypothetical derivative method.

In these hedge relationships, changes in timing of the hedged transactions is the main source of hedge
ineffectiveness
a. Disclosure of effects of hedge accounting on financial position:

b. Disclosure of effects of hedge accounting on financial performance:

 c. The following table provides a reconciliation by risk category of components of equity and
analysis of OCI items, net of tax, resulting from cash flow hedge accounting

To hedge its risks associated with foreign currency fluctuations relating to highly probable forecast
transactions, the Company is using foreign currency forward contracts. They also designate such
forward contracts in a cash flow hedging relationship by applying the hedge accounting principles. The
forward contracts are stated at fair value at each reporting date and Changes in the fair value of these
forward contracts that are designated and effective as hedges of future cash flows are recognised
directly in (OCI) and accumulated in “Cash Flow Hedge Reserve Account” under Reserves and Surplus,
net of applicable deferred income taxes and the ineffective portion is recognised immediately in the
Statement of Profit and Loss. Amounts accumulated in the “Cash Flow Hedge Reserve Account” are
reclassified to the Statement of Profit and Loss in the same period during which the forecasted
transaction affects Statement of Profit and Loss. For forecasted transactions, any cumulative gain or
loss on the hedging instrument recognised in “Cash Flow Hedge Reserve Account” is retained until the
forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, the net
cumulative gain or loss recognised in “Cash Flow Hedge Reserve Account” is immediately transferred
to the Statement of Profit and Loss.

Suggested Hedging Policy

We tried to devise a hedging policy for Lupin based on its foreign currency exposure. 50 % and 100 %
hedging scenarios were simulated using forwards and options and the profits/loss in each scenario
was calculated. Out of the scenarios we simulated, 100 % hedging using put options with a strike price
of 69 INR was giving the maximum protection to the company from currency fluctuations. In the
possible case of appreciation and depreciation, this policy was able to make profits.

While calculating the economic exposure, the market beta & forex beta value came around -0.004
even after company is having net receivables. This anomaly is due to other macro-economic factors
that affected the stock price ( like tightening of USFDA regulations).