I had doubts on the FX handling of this business. On going through the material on the company my understanding is as below.

1) The company imports its raw materials from outside, hence any appreciation in the USD/EUR (depending in which CCY it pays) will benefit the company. Hence the company needs to hedge on the required CCY (let us call this the first leg)
2) Company derives majority of its revenues from outside, 55-60% from Europe and 15-20% from USA. Hence a depreciating CCY (EUR/USD) will help the company. Company needs to hedge against appreciation (let us call this the 2nd leg)
3) As the company imports its RM, the import and export gives it a natural hedge. However degree of imports need to be weighed against the exports.
4) Company books revenues on the day of generating the invoice, the exchange rate that it takes is the once that is provided by the custom department. However when it realizes the amount depending on what the rate is, it books a profit/loss and puts it on the P&L account.
5) The company realization per tonne may be effected by CCY. In Q1FY16 the management realized 219000 per tonne, the figure for Q1FY15 was 241000. As per the management this is not due to price drop but due to CCY movements which is not hedged uniformly through out the year.

However on going through few of the con calls, the management has not hedged the second leg EUR-Rupee. It seems that the company is taking a bet on the direction of the currency.

The above is my simple understanding. I would like to understand if there is anything more to it and what more does one look at. However one would buy the business based on its operational strength and not on any currency movements.

Regards,
Chetan Chhabria

Yes, out of the 7% odd increase in EBITDA margins, 4% is driven by lower fuel costs.

But if you see the qoq sequential results, the fuel costs have actually gone up by 6%.

The debt reduction figures have been taken from the screener.

Other current liabilities have decreased sharply from 110 cr to 11 cr. Major contribution to this comes from Customer Advances. This could be a strategic move by the management to increase the margins. since their receivables is in comfortable position and they have enough cash balance, they might have taken this decision to improve margins (higher selling price)

Anil wonderful questions - infact, I attended the AGM in chennai and had the some concerns about this getting commoditized. To counter this, much like infosys, MPS is adopting a platform approach where they take on a customer's entire process on their software and keep re-engineering their work processes to increase automation. So, it sort of becomes a platform led BPO operation which is very sticky and can deliver good returns - think eclerx.

if anyone, Nishith understands this game and I remain bullish on him delivering - he understands profitability and cash flows and is not running after building an empire and the impression I got of him is that he is a patient, shrewd guy who can wait for the right opportunities. I see an analogy with eclerx - lots of tuck in acquisitions each of which kicked in operating leverage 18-24 months post the acquisition - resulting in a 25 % compounder ahead.

Also, MPS could ultimately become an acquisition for a larger guy which nishith may be open to - given he understands the importance of growth.

I am invested in MPS and looking to add slowly - I see it as a modestly asymmetric bet - little downside and decent upside with optionality from acquisitions.