The stock price of Sintex Industries has taken a severe beating due to concerns over widening mark to market (MTM) losses on its Foreign Currency Convertible Bonds (FCCBs) amidst significant Rupee depreciation. In this note, we analyze how the FCCB losses will impact earnings and consequently, the valuations of the company.
Background
The company issued FCCBs aggregating to US$225 m in 2008. These FCCBs were due for redemption in 2013 and the conversion price was reset at Rs 247 per share. At that point in time, the exchange rate was in the region of Rs 44-45 a dollar. However, the recent depreciation in Rupee has resulted in a significant increase in MTM losses, thereby impacting the profitability of the company. The following table compares the FCCB gain/loss at an average exchange rate prevailing during the last 3 quarters.
Background
The company issued FCCBs aggregating to US$225 m in 2008. These FCCBs were due for redemption in 2013 and the conversion price was reset at Rs 247 per share. At that point in time, the exchange rate was in the region of Rs 44-45 a dollar. However, the recent depreciation in Rupee has resulted in a significant increase in MTM losses, thereby impacting the profitability of the company. The following table compares the FCCB gain/loss at an average exchange rate prevailing during the last 3 quarters.
| Year | Avg Rs/$ Exchange rate | FCCB Gain/(Loss) (Rs m) | Profit/(Loss) for the period (Rs m) |
| 1QFY12 | 44.89 | Not disclosed | 946 |
| 2QFY12 | 45.79 | -596 | 388 |
| 3QFY12 | 50.85 | Huge loss expected | Yet to be announced |
| Source: Oanda, Company reports and Equitymaster |
Looking at the table (depicts significant rupee depreciation) it is clearly evident that even if the company reports operating margins in the region of 17-18% (past 5 year average) it will not be able to absorb the notional exchange loss on FCCBs and may report a loss during the current quarter.
Redemption scenario explained
Considering that the conversion price (Rs 247) is significantly higher that the current market price (Rs 71) we do not expect equity dilution/conversion in 2013. As a result, the company will have to redeem the FCCBs. Taking a pessimistic approach, we assume an exchange rate of Rs 50/US$ in 2013. This translates into rupee debt of Rs 11.2 bn (US$225m*50). Add to that a redemption premium of 25% (inclusive of implicit interest cost) and the total outflow could be in the region of Rs 14.0 bn.
Further, let us assume that the company will refinance the entire amount at maturity with debt at an interest rate of 9%. It may be noted that over the last 10 years, the company has raised debt (exclusive of FCCBs) at an average cost of about 7.5%. Also note that here we do not take into account the surplus cash of Rs 5 bn (unutilized amount of FCCB issue which the company can use for redemption) lying idle on the balance sheet as fixed deposit assuming that it will be used for working capital requirements. Thus, after refinancing at a higher interest rate, the net impact on the profits would be Rs 14.0 bn * 0.09 = Rs 1.3 bn, both in FY 13 and FY14.
Why isn't the company refinancing now?
In order to avoid exchange losses, the company has an option to refinance the FCCB debt straight away. However, we believe that refinancing doesn't make sense now. If the FCCB debt is refinanced now it will hurt the profitability as the company will have to borrow in local currency where interest rates are higher. Further, refinancing would mean that the increase in interest expenses will be actual in nature while FCCB losses are notional. Secondly, if the Rupee appreciates by 2013, the actual outgo on FCCB redemption too can be less than what it can be now. Hence, it's logical to stay put and utilize the cheaper debt (FCCB) rather than refinance the same.
Our view
Assuming that the FCCB will be up for redemption in 2013, we have revised our estimates accordingly. The following table highlights the key changes in financials post redemption.
| Particulars | Year | Previous Estimate (Rs m) | Revised Estimate (Rs m) | Comments |
| Debt | FY13 | 29,551 | 33,567 | The debt levels will increase as the company will have to refinance the FCCB debt amidst significant Rupee depreciation |
| FY14 | 30,527 | 34,543 | ||
| Interest | FY13 | 1,365 | 2,631 | The interest expenses will increase as the cheaper FCCB debt will be replaced with local currency debt |
| FY14 | 1,434 | 2,700 | ||
| EPS* | FY13 | 18.9 | 13.7 | Higher interest expenses will dent bottomline |
| FY14 | 21.7 | 15.4 |
| * EPS estimates are in Rupees |
Based on these revised estimates, we reduce our target price downwards to Rs 185 per share. Nonetheless, considering the upside potential from current price levels and future growth prospects, we maintain over positive view on the stock from a 2-3 year perspective.
No comments:
Post a Comment