About Nestle India

INTERNATIONAL FINANCE MANAGEMENT
CIA-1
FOREIGN CURRENCY RISK ON NESTLE,INDIA
Under the guidance of
Prof. Priyanshi Gupta
Submitted By-
Sambhavi Singh
1827653
MBA -F1
About Nestle India
Nestle SA is the world’s largest food, beverages and nutrition company with its headquarters
at Vevey, Switzerland. It has an annual turnover of $120 bn and employs 280,000 people
across 511 factories in 86 countries.
Nestle India is a partly owned subsidiary of Nestle SA (Nestle S.A. is the majority
shareholder with a 62% stake). It is one of the largest players in the FMCG space in India
with a market cap of over 41,000 crores and an annual turnover of Rs 6260 crores for the FY
2018.
The Company primarily operates in the areas of -
 Milk Products and Nutrition
 Beverages
 Prepared Dishes and Cooking Aids
 Chocolates and Confectionary
MAJOR FOREIGN EXCHANGE RISKS-
The firm is exposed to foreign currency risk from “transaction” and “translation”.
Nestle India’s transaction exposure consists of:
1. Imports
2. Exports
3. Purchase and Sale of fixed assets
4. License Fees and Other Expenditures
5. Future Transaction exposure arising out of loan in foreign currency (CHF)
Translation exposure –
Nestle India follows the monetary/non-monetary method of recording its foreign exchange
transactions.
The company is also subject to Interest Rate Risk.

OPERATIONS CONTRIBUTING TO THE FOREIGN EXCHANGE RISK
The transaction exposure arises from transactions in the foreign currency.
The translational exposure arises from the consolidation of the financial statements of foreign
operations in Swiss Franc, which in principle is not hedged.
It is furthermore exposed to the primarily fluctuation in USD and EUR interest rates.
RISK MITIGATION PROCESS FOR NESTLE
1. FORWARD HEDGES
Nestle India primarily employs Forward hedges to hedge against currency fluctuation risks.
They mostly use the Forward Hedge options as:
1. Firstly, they act as an effective lockdown of value and hedge against adverse risk
2. Nestle uses the hedges for a minority of its exposures. This is because a lot of its
exposures benefit from exposure netting from the parent company’s side
3. Also locking down a significant part of exposures using forwards limits the profit that
can be made from a favourable change in forex rates.
2. INVOICING IN DOMESTIC CURRENCY
Nestle India invoiced significant portion of its exports in rupees. Out of the total exports of
Rs 3537 million, only Rs 1503 million were denominated in a foreign currency. The
remaining amount i.e. about Rs 2034 million or about 58% of its exports are not exposed to
any transaction risk as they are denominated in rupees.
3. EXPOSURE NETTING
Nestle S.A. enjoys huge risk mitigation, as a lot of the forex transactions carried out are
between its subsidiaries. However this indirectly benefits Nestle India as well, as a large
amount of its imports and exports end up taking place between its compatriots.
For e.g.: A loss due to adverse changes in forex in a transaction with Nestle UK does not
reduce the competitiveness of Nestle India.
The total sales to fellow subsidiaries totalled Rs 1903 million. Total transactions with fellow
subsidiaries was Rs 4876 million which is in excess of 50% of all foreign exchange
transactions during the year.
EFFECTIVENESS OF THE STRATEGY BY NESTLE
Although the company has taken all the steps to ensure there is minimum risk on the forex
management, there have been particular losses as such-
 Exchange difference recorded in the income statement represented a loss of CHF 54

million in 2018. They are allocate under expenses by function
 Value At Risk (VaR) based on the historic data for a 250 day period and a confidence
level of 95% results in one-day loss for currency risk of less than CHF 10 million in
the year 2018 and 2017. The VaR doesn’t represent actual losses as the group cannot
predict the future currency movements.
 With the impact of the interest derivatives, the proportion of financial debt subject to
fixed interest rates for a period not longer than one year represents 62%. The net debt
structure would further increase by 100 basis points of the interest rate, thereby
causing an additional expense in net financing cost of debt of CHF 42 million.
RECOMMENDATIONS
The company can use the following other options to mitigate the risk arising out of the forex
management –
 While purchasing or selling, the prices can be quoted in the domestic currency itself.
 Borrowing or lending must be done in one base currency.
 Unperformed foreign exchange contract must be written off
 The company can use more derivatives to hedge the risk of foreign exchange
currencies.

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INTERNATIONAL FINANCE MANAGEMENT

FOREIGN CURRENCY RISK ON NESTLE,INDIA

Under the guidance of

Prof. Priyanshi Gupta

The Company primarily operates in the areas of -

 Milk Products and Nutrition

 Prepared Dishes and Cooking Aids

 Chocolates and Confectionary

MAJOR FOREIGN EXCHANGE RISKS-

Nestle India’s transaction exposure consists of:

3. Purchase and Sale of fixed assets

4. License Fees and Other Expenditures

5. Future Transaction exposure arising out of loan in foreign currency (CHF)

The company is also subject to Interest Rate Risk.

The transaction exposure arises from transactions in the foreign currency.

RISK MITIGATION PROCESS FOR NESTLE

They mostly use the Forward Hedge options as:

EFFECTIVENESS OF THE STRATEGY BY NESTLE

 Exchange difference recorded in the income statement represented a loss of CHF 54

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