Stocks

Will Sterling Biotech Default on FCCBs Today?

5 comments Written on May 16th, 2012 by
Categories: FCCB, STERLINBIO, Stocks

Sterling Biotech is in serious trouble. With plunging revenues and a very high debt cost, they're now also going to have to pay back $183M worth Foreign Currency Convertible Bonds (FCCBs).

(Read more about The FCCB problem)

STERLINBIO (the NSE Code) borrowed $250 million in 2007, with a conversion price of Rs. 163.13 till May 2012, at a fixed dollar rate of Rs. 42 to a dollar. Some of this was converted - the graph below shows you the stock stayed above the conversion price till mid 2008 - and some was bought back from the open market (FCCBs trade in markets abroad), after RBI allowed companies to do so at a discount.

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The stock is at a miserable Rs. 8 today, which basically throws any chances of conversion out the door. Even if it was Rs. 163, it wouldn't be converted, since the dollar rate is fixed at 42 for the conversion - the current dollar rate is Rs. 54 or so; the equivalent break-even rate would be Rs. 205.

In the face of no-conversion, the money has to be returned, with some interest. Nearly $184 million needs to be repaid today (16 May 2012) - a total of 993.6 crore rupees (9.936 billion).

Sterling Biotech hasn't got the money, it seems. Their recent results show a loss of Rs. 92 cr. in just the JFM quarter, with even the December quarter showing losses. Their main business of Gelatin has been seriously impacted by higher effluent discharge anti-pollution norms, and their CoQ10 products have been hammered by cheaper Chinese competition.

The company has huge debt - the debt:equity ratio is now 8:1 compared to about 1:1 in 2007. They have another $670 million worth of loans from local lenders and External Commercial Borrowing (ECB). They've even restructured with local lenders to give them a two year moratorium on both interest and principal, and ECBs are anyway back-loaded so they're probably have a two year headroom.

But the FCCB comes due today and a default is imminent. I don't have any news of an FCCB restructuring and if there is no news today the company will then have defaulted on $184 million. The last big default was Wockhardt, which was half this size (Less than $100m). And Wockhardt might even repay.

I bring your attention to my earlier chart on FCCB redemptions in 2012:
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Now the $184M is a significant part of that massively stressed portfolio of FCCBs in May, and look further into June and July as the total redemption value shoots even higher. July has a $421 million potential default on FCCBs.

Some of these companies have borrowed from local lenders too. When they default on their FCCBs, the FCCB holders will file a winding-up petition (like Zenith and Wockhardt) and that might result in the local lenders having to restructure as well. Additionally the court delays in completing a pay-up-or-shut-down operation will scare lenders abroad from lending more to Indian companies - a situation that means companies can't borrow abroad (through ECB or such) to repay the FCCBs.

Since India finances its trade deficit through investment flows, a slowdown in investment is the death-knell for the rupee. While we may have written off Sterling Biotech as a gone-case, what its default might trigger is an avalanche.

Posted in FCCB, STERLINBIO, Stocks

Chart: Infy Result Impact, Worst in 5 Years

5 comments Written on April 13th, 2012 by
Categories: ChartOfTheDay, Infosys, Results, Stocks

Infosys is a big player on results day, though mostly downwards, it turns out.

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With an underperformance this quarter (a drop in QoQ results) the fall wasn't surprising. But it is the worst in five years.

And in other good news, I have found a house in Bangalore, and hope to close the deal in a couple days. Hopefully, I'll be writing from my new place next week. (Renting. I can't afford to buy!)

Posted in ChartOfTheDay, Infosys, Results, Stocks

CRISIL Buys Back Shares, Gives Them To Employees as ESOPs

2 comments Written on March 7th, 2012 by
Categories: CRISIL

You gotta admire the gall. CRISIL – the credit rating agency:

  • decides to buy back shares at a max price of 1,000, for upto 80 cr. on 15 Dec 2011
  • By 30 December 2011 it’s bought back 910,000 shares at an average price of Rs. 871, and closes the buy-back.
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  • In Feb 2012, they decide to issue nearly as many shares back to employees as ESOPs.
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You see the way this works? Use company cash reserves to buy up 9 lakh shares from the market. You think, as an investor, that this is good because now the company’s profit is spread across fewer number of shares and that will drive EPS up.

But no, there will be new shares – about 9 lakh shares, almost exactly the same quantity – issued as ESOPs to employees. So the EPS won’t change much for existing shareholders.

Employees will have to pay current market price for these ESOPS, but effectively the company is paying for them. ESOPs are like options, and five year maturity options at Indian interest rates is a pretty hefty sum per share. A three year ATM option for the Nifty at 5200 strike costs about 1,200 rupees, which is about 20% of the Nifty – a five year option for a more volatile CRISIL would cost something like 25%

Effectively, at Rs. 900 per share, the option costs the company Rs. 225 per share. A grant of 9.35 lakh shares costs the company more than Rs. 20 crores, Not all of that will be appropriately accounted this way, I’m sure.

Interestingly, SEBI doesn’t allow ESOPs to be granted or exercised when a buyback offer is on. Little wonder that they wrapped up the buyback in 15 days!

I wonder if institutions will oppose such behaviour. It used to be common in the US in the late 90s, when Dell, Microsoft and Intel were buying back shares and issuing ESOPs constantly. In fact, Dell even wrote put options on its own stock (and ended up making both big gains and losses). But given that it is illegal to run these simultaneously in India, and that institutions do hold CRISIL, I hope the larger investors ask tough questions.

Disclosure: no positions.

Posted in CRISIL

ONGC Share Auction Rescued By LIC

No Comments » Written on March 1st, 2012 by
Categories: ONGC

The government wanted to sell 12,000 cr. worth shares of ONGC (42.77 cr. shares at a floor price of Rs. 290) today, and the auction – a special scheme that SEBI allows for promoter entities to offload shares in a market parallel to the stock market – seems to have been rescued by the public insurer, LIC.

Only about 29.22cr. shares were sold until the ed of the auction, which means just 8,400 crores were collected. The rest (nearly 4,000 cr.) was pushed through by LIC at the last moment, it seems – though the official statement is that certain buy orders were not recorded.

ONGC shares ended at Rs. 287 for the day, lower than the floor price of Rs. 290. The auction by itself has been a flop – the LIC rescue is what the government does when things don’t go its way; after all, who’s to question the public insurer what it will do with its money?

Earlier, State Bank of India (SBI) said it will bid for shares, which doesn’t make any sense – SBI has huge problems with capital, with a really low capital adequacy ratio; any money it has will have to be used to shore up its capital base. It really has no business buying equity – if it loses, say, 100 cr. when the price of ONGC falls, that further hurts its capital ratios!

This stake sale comes a few days after a huge number of bids flooded Citibank’s stake sale for nearly 10% of HDFC. Perhaps the government thought they’d pull through, but there was one big difference: the price. Citi sold HDFC stake at the 660 levels when it had ended the previous day at 700+. ONGC’s floor price was ABOVE market price – very strange for a large stake sale. (That said, HDFC’s P/E is like 25 versus ONGC’s 10)

But the main issue is: Oil under-recoveries by the likes of HPCL, BPCL and IOC are over 125,000 cr. for this year. Some of this is usually thulped on ONGC; we don’t know how much, and it’s decided at the whims and fancies of the government. Sure, ONGC is quoting at only 10x the profit of FY12, but if these profits can be eroded by a simple random statement that assigns ONGC the bulk of the refiners’ losses, then the uncertainty in earnings makes the share a shaky buy.

The government of course does not want clarity because they need to stuff as much loss to ONGC as possible. They simply cannot subsidize the losses on their own balance sheet, where the fiscal deficit is already at 5.5% of GDP or more. So the profitable public sector oil entities (read; Oil India and ONGC) will have to take big hits through “upstream sharing”. If they do reveal how much, no one will buy the ONGC shares. And I suppose because they didn’t, not many were interested either. The LIC deal may have saved the day: we’ll know soon when the mandatory disclosures come in (LIC already owns 5% of ONGC, they have to disclose further purchases). LIC supposedly rescued the NTPC IPO earlier!

Subsequent auctions are going to be tough. The government needs to relook pricing. It sold NHPC at Rs. 36 – a ridiculously overpriced share – and it sits at Rs. 21 today after more than a year. Too many public sector stake sales are at unreasonable prices, and LIC can’t rescue them every single time.

Posted in ONGC

Kingfisher Doesn’t Need A Bailout

1 Comment » Written on February 28th, 2012 by
Categories: KFA

Too many articles have been talking about the situation at Kingfisher, with the assumption that:

a) Kingfisher is a private carrier and can’t be bailed out.

b) But if it dies, it will impair, very seriously, many state owned banks, so it must be rescued as a necessary evil.

This is not correct. Let me explain.

Firstly, let me say that if the banks do get into trouble, the better mechanism is to bail out the banks by adding equity to them. This will hurt the banks’ shareholders (since more equity means more shares to distribute profits to) but that’s the risk taken by shareholders – a public-sector bank may not go bust, but the shares can go to zero.

Kingfisher, as a private entity, must be allowed to fail. The total loans it has taken come close to 8,000 cr. which is significant in the sense that it is about 1.5% of total bank capital, obviously, concentrated in a few banks. That 8,000 cr. is not a hit the banks will have to take immediately – RBI has even mentioned earlier that they can take the hit amortized over time if they like. Plus, about 25% of the hit has already been provisioned, so what’s left to be taken is about 5,000 cr.

Assume the hit is spread over 3 years – 12 quarters, meaning Rs. 400 cr. per quarter, which is not very difficult for the system. It may require that a few banks merge and raise some capital; some from the government, some from the public. It may need banking profits to be down substantially to account for the hit, which is all right. The “bail out” will then have to just add capital to banks appropriately, if required.

And the fall won’t be sudden. In India, companies don’t just go bankrupt. They take years to die. They won’t pay back their loans, perhaps, but they’ll go through a long round of negotiations about assets and brands and so on, and if they do die, may take five years or so. By that time, everything will be forgotten and banks would have moved on.

The airline sector will lose some jobs, and some routes will see price rises. That is also all right, since we need to see the profits in this industry return, even if briefly until some other joker decides to put his money into the pie and cut fares like crazy.

Many other articles call for Mallya to put his personal money or sell UB shares or such, to save the airline. Now unless he has siphoned off money from KFA, this doesn’t make any sense. He is a shareholder and stands to lose what he’s invested – just because banks gave the entity a lot of money doesn’t mean they have recourse to his personal funds. (In some cases, they might take promoter collateral, and some banks have, but by and large Mallya has no personal liability) 

The need for a bailout is not for Kingfisher, and is unlikely to be needed for the banks as well.

Readings:

Posted in KFA

Citi Sells HDFC Stake For $1.9 Billion

4 comments Written on February 24th, 2012 by
Categories: HDFC

Citibank has sold it’s 9.9% stake in HDFC (not the bank) at 657.6 rupees – with 14.5 crore shares sold today in a block deal. Buyers include FIIs and a TV report even mentioned Reliance Industries (their treasury ops).

The price is substantially lower than the Rs. 700 price on Thursday, but the stock has recovered to just 3.3% down at 677. If you’re wondering why CITI would sell for so much lesser, the dynamics of a stock sale are that you demand bids and you sell at those bids – you can’t afford to sell that stock in the retail market directly (the stock is likely to tank even more) and it seems bids were around the 645 range.

HDFC chart

The profit Citi makes is about $770 million which should work well for their own capital requirements.

Will the sale affect HDFC? At this point, it doesn’t seem like it. Keki Mistry has taken great pains to make the media understand that most buyers are FIIs and long-only funds (which means they might actually stick around for the longer term, and may not sell immediately). This should mean that stock price is safe from another round of selling.

The stock has been hanging around between 600 and 700, and growth has slowed a bit. The Q3 EPS was 6.56 versus 5.91 a year back, a 10% increase. Even with an EPS of  Rs. 28 for the full year, the P/E is still 24. A good part of the value, though, is for its ownership of HDFC Bank, the Mutual fund AMC and the Insurance business.

Disclosure: no positions.

Posted in HDFC

A Hard Time For Kingfisher Airlines

4 comments Written on February 21st, 2012 by
Categories: KFA, Stocks

Kingfisher Airlines is in trouble for cancelling flights, it seems. They have cancelled 50% of their flights on Monday (according to WSJ) and 50 pilots have resigned in a week. They have cancelled 30 more flights today and stopped all flights to Dhaka. The airline regulator DGCA has called the top brass to explain why so many flights were cancelled and requested other airlines to accomodate them.

Kingfisher has explained that its bank accounts were frozen by tax authorities – the accusation was that they haven’t deposited the TDS they have collected. (When a company pays salaries, it deducts a certain portion as income tax at source; this is supposed to be deposited to the tax department by the 7th of the following month.) Employees haven’t been paid, and pilots have said goodbye.

By and large the industry is suffering, but in Jan 2012 – the DGCA has removed the data from 2011 – Kingfisher is not the biggest culprit for cancellations.

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Secondly, Kingfisher has done pretty well – again according to the DGCA  - it has the best on-time performance of the lot.

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And also, the (nearly) lowest passenger complaint ratio!

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Now I don’t know how reliable this data is, as Kingfisher has had serious news items about cancellations, but the data shows it’s not doing as badly as one would think?

The share has fallen 9% today but is at least 20% higher than the lows of Jan.

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While the stock craters, news comes in that certain FIs have converted part of their debt to equity at Rs. 25 per share, even if that may be forced. Banks are calling the exposure to KFA an NPA, lenders are trying to sequester assets, airports are refusing them entry unless they pay, oil companies want them to put down cash for the oil they get, and companies that leased them planes are taking the planes back quoting non payment of rent. This is not a good sign, and no matter what the reports, this seems to be the perfect storm for Kingfisher.

Disclosure: no positions. I won’t be buying, even if the data looks good. (Honestly, the DGCA data is something I suspect now).

Posted in KFA, Stocks

RIL Buyback: Pump And Slump?

3 comments Written on January 19th, 2012 by
Categories: Reliance, Stocks

Reliance Industries has said it will consider a share buyback in its Friday board meeting, and the stock went up 5% to 780. The theory is that Reliance will use its huge cash reserves – over 85,000 crore – to buy back about 10,000 to 12,000 cr. worth of stock. They will do this using a “market buyback”, where an investment banker will buy Reliance shares using Reliance’s money.

(For more information on what market buybacks are, read my article: Buying Back Our Deficit)

Moneylife finds that they have done a buyback announcement earlier, that didn’t quite meet their stated goals:

RIL has announced a buyback. It had announced a buyback on 28 December 2004. On that occasion the maximum buyback price announced was at Rs285 per share (that is, pre-bonus price of Rs570 per share). The maximum buyback price RIL announced was about 10.87% premium over the share price just before the buyback announcement.

The buyback program, seven years ago, was kept at Rs2,999 crore, which was about 10% of the share capital and free reserves of Reliance as on 31 March 2004.

However, throughout the period, Reliance bought back its shares only on nine days. And, the total buyback done by the company was a measly Rs149.62 crore. So, the actual buyback program was just 5% of the total buyback size of Rs2,999 crore.

(Emphasis mine)

This is not just Reliance, but in most market buyback announcements I have tracked in the last five years, companies have bought substantially lower quantities than they supposedly intended to. The idea of a share buyback was usually to keep the stock price up, but a few days after the announcement the shares would go back down. (Also see: Rajat Rajgarhia of Motilal Oswal thinks the aim is to “shore up sentiment in the stock”)

Another reason I’ve seen quoted for this announcement is that Reliance lost its position as the top weighted stock on the Index, and that Mukesh bhai is big on ranks. Not that this is substantiated, but it’s such an awesome gossip conspiracy story that I had to mention it!

It’s not usual, though, that a company of Reliance’s size – one of the largest in India – makes such “preliminary” announcements, but the company has been very careful to ensure that the stock doesn’t crater around bad results seasons. They have announced gas finds, deals, and agreements, nicely timed around results announcements, which is all above board (and it’s not just them, the big IT company we all know about has done it as well).

The stock, in the last couple years, has not done very well:

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And in relative terms, the high for this stock is 1,650 in 2008; and it recently saw levels of 685.

Will this announcement take Reliance to the next level? Chances are: no. They have to show great results. Their Q2 numbers were not great, and their gas and crude finds are in decline; for serious growth they have to rapidly increase investment. While a buyback at this level for the company is good (lesser capital to service), there will be large capital requirements coming in as they explore and find gas, invest in shale assets, expand the broadband/BWA offering, enhance their retail setup or indeed, make their massive refining operation more efficient. These are real game changers, not the buyback.

If the quick rise from the bottom – nearly 20% now – is exciting, then the game is in short term trading, not in a “buy and hope for the Ambani magic”.

Posted in Reliance, Stocks

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