JPAssociates

So FCCBs do hurt, or do they?

No Comments » Written on October 21st, 2008 by
Categories: JPAssociates
A follow up from my post "The Falling Rupee and the FCCB problem" (Sep 11, 2008). ET confirms that this is indeed showing up in results.
Delhi-based drug major Jubilant Organosys has recorded a hit of Rs 174 crore for the second quarter as a notional loss on its outstanding FCCB and other foreign loans. The rupee value of these loans has gone up as the dollar has appreciated sharply against the Indian currency. Other drug companies such as Biocon and Alembic have also recorded losses on the same account.

The malaise is not restricted to any one sector. Auto ancillary manufacturer Balkrishna Industries and IT firm Rolta have also seen losses on the front. While the latter took a hit of Rs 61 crore on the forex account, the former has taken a charge of Rs 31 crore.

FCCBs were a preferred route for raising money some years back. Foreign investors would typically put money into the company at a very low interest rate, which could be converted to equity over a certain period. Usually, the conversion price would be 30-40% higher than the then market price. If not converted, the money would be treated as a loan.

Not only are there temporary mark-to-market losses, some of these companies have to contend with loans they weren't quite willing to repay (they assumed conversion). JP Associates, for instance, has fallen even more since that post - and their conversion price is Rs. 247. Current price? Around Rs. 80.

But they announced results today - EPS of Rs. 1.57 versus some 0.86 last year, a phenomenal growth. I don't see the impact of the forex losses mentioned - as I can imagine, many companies will not take it up when it's losses (choosing to only take it up when it's gains). I hope that is not the case with JP.

(This is not just the conversion of course - lots of other factors, overall sentiment etc. But the conversion price is now looking even more difficult to achieve, plus they now have a 1800 cr. rights issue coming up. This is one helluva tough cookie - but guess what, management bought 1 cr. shares at Rs. 397 each, so they must be really confident. )

Posted in JPAssociates

SOS Trade: Short JPAssociates, Nifty, plus Update

1 Comment » Written on September 13th, 2008 by
Categories: JPAssociates, Nifty, ShortOnly
In my Short Only strategy I would choose to now short the Nifty. Yes, I should have kept it on from the beginning, but these are things only viable in hindsight. The idea now is to use more of the virtual money I have on this system - so 20% will go towards this Nifty short. That's about 250 Nifty - remember, no leverage. At 4238 this is a tough ask, but I think it's going way way below this.

Also I would add JP Associates to the short list. Why? Multiple issues:

  • Basic money comes from Cement and Construction. Sectors I don't think have a big future regardless of stuff like commonwealth games or some UP expressway or anything like that. Real estate and construction is dying in the next five years.
  • They have some investments in Power, but given that power is a long and capital intensive business, it deserves nothing more than a p/e of 10 or 15.
  • The land bank to me is of zero value unless they sell it, and when they do sell it I can almost bet they won't make as much as people think they will make.
  • They have a P/E of 30. I doubt their core business or others can do that kind of growth in the next three years.
  • The killer is an FCCB loan of about $400 million outstanding, till 2012. They haven't accounted for it as debt. It's convertible at 247. It carries an interest of 8%. The dollar has depreciated 10%. The call is out of the money and if they have to account for interest and the dollar fall, they are likely to wipe out significant profit straightaway.
  • The full interest, till 2012, is $180 million on the FCCB. SO per year, $36 million. At today's rate of Rs. 45, this is 162 crores - per year. Their profit last year was 677 cr. That means just the impact of accounting for this loan wipes out 30% of profits!
  • FCCB conversion at 247 in 2012 means the share should actually be 406 or above, because otherwise people will take the money (the interest will go to that much). Of course, if they change the conversion price, all bets are off.
  • I would see this stock falling about 50% from here, even though it has fallen a lot from its highs.
Last, an update.It's now been a month since I started and honestly, I've done fairly badly on it. Here's the current situation.

The strategy is up 1.2%. The Nifty, in the same period, has fallen about 7%, from 4550 to 4238. I only had about 20% allocated - except for a put last month I never exceeded that. Now I have about 50% allocated, and I am likely to add more as the days go by. Now some of you may say - hey, you were UP when the market was down, so it is good anyway. That's not the point - the point is to stay short in good and bad times, and make money in either market. If one doesn't make good money when the market goes down, it will not help when the markets rebound.

This is a learning experience for me as well - and it will always be so. I don't have any positions at this point on the stocks above (other than a long strangle on the Nifty, which benefits in both a sharp upside and sharp downside). Remember, this is educational and not intended as advice.

Posted in JPAssociates, Nifty, ShortOnly