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February 5, 2009

Firstsource Solutions declares Q3 Results…Mounting FX Translation Loss evaporating Reserves

Very Cleverly,as is also not mandatory,Firstsource Solutions has avoided stating the Reserves position for the Nine Months ended December 31,2008 in both their Consolidated and the Standalone Results

Firstsource Solutions has a current Equity of Rs 428 crs and had Consolidated Reserves of Rs 313 crs and Standalone Reserves of Rs 201 crs as at March 31,2008.

In the Current Year for the Nine Months as at December 31,2008,the Company has accounted for Rs 158 crs as Fx Translation Loss through Reserves (early adoption of AS 30) and has shown a Consolidated Loss of Rs 10 crs  and a Standalone Loss of Rs 32 crs

When we adjust Reserves to reflect Current Year Results,we get significantly reduced Reserves at December 31,2008 of Rs 144 crs on a consolidated basis and just Rs 11 crs on a standalone basis !

If Translation Loss mounts further in Q 4,Standalone Reserves will simply turn negative dropping Book Value below Rs 10 

Company has 6.75% FCCB Bonds to the Value of US $ 275 Million and Translation loss on this arise as the Dollar has been appreciating aganist the Rupee

Normally Exchange Risk for a pure play BPO outfit with Foreign Currency Denominated Debt is taken care of or hedged with the  Fx Invoicing and therefore Fx Inflows…However these FCCB Bonds mature only in 2012 and moreover Company’s operating margins are below 10%

On hindsight it does appear very foolish to have taken such a currency risk…probably the Board of Directors,that boasts of top Financial Names,had only an eye on the FCCB optional conversion Price of Rs 92.60 ! and the strong possibility at the time that the Dollar would depreciate !

It would appear that the IPO Investors paid a very High Premium in Rupees of Rs 54 (IPO of Rs 64 in Jan/Feb 2007) to create the Reserves only to see them evaporate as the Company took on a high Currency Risk in Dollar Debt…also it was clearly with the shortsighted and vested objective of making a quick buck,albeit notional, that the promoters ,ICICI Group and the FIIs,were allotted Shares at par or at very low premiums…They contributed inside Rs 100 crs for an aggregate 85% stake,while IPO Investors picked up 60 million fresh shares at Rs 64 and contributed the bulk of Rs 384 crs for less than 15% stake

The Company is apparently caught between the Devil and the Deep Sea here…Should it switch from Dollar Debt to Rupee Debt to kill any further potential and killing FX Translation Loss if Dollar appreciates towards Rs 60 ?…Is it in any position to do this in the first place ?….because FCCB Holders will await 2012 Maturity date and will not exercise conversion at Rs 92.60…However if they feel there is a good chance of default they may be willing to sell of these Bonds cheaper than Maturity Value and at a discount…Firstsource Solutions may not have adequate Liquidity to redeem these Bonds at a discount now.Raising further Equity looks difficult…The Equity base is already too high at Rs 428 crs and the Share price is very Low at @ Rs 14 now,up from under Rs 10 last week !  read more

Satyajit Das,author of ‘Traders,Guns and Money’ just appeared on NDTV Profit….Here’s what he said on the Global Crisis

Hey ! just saw Satyajit Das on NDTV Profit this morning…speaking from Sydney…Check out my Pages section in the section,Books you must read…I have featured Satyajit Das’s ‘Traders,Guns and Money’…a book where he states that  Money cannot be made Honestly in Derivatives !

Here are  some views expressed by Das on TV this morning

  • 2009 will be a worse year than 2008
  • The US ‘Bad Bank’ Proposal that will have the Government take on the Toxic Debt from all Banks onto it’s own Books..It will in one stroke clean up all banks to facilitate their revival and create fresh leverage for Operating…..This will only transfer the problem from the Individual and the Company to the Government…When actually it should be  de-leveraging that should take place…This is not happening…The Problem was created by excessive Debt in the first Place
  • The Chinese Premier gave a recent warning that was not widely reported…He warned that China will only buy that much US Treasury Bonds that will cater to it’s needs….This clearly means that China will not support US Treasury Issues like it has in the Past…Throws up the Exchange Risk of the Dollar
  • Exports  to China from Japan and Taiwan and Korea have dropped by 24% to 40%…China is the work bench of the World…It imports ,assembles and manufactures and then exports…USA and Europe are not buying and therefore Chinese Exports have dropped…..Two Million expat worker jobs  will go…One of Seven expats in China will lose their jobs…Many Factories closed for the Holiday Season may not reopen
  • Emerging Markets will be Hit 
  • Recession is when others are losing their Jobs…Depression is when you lose yours ! 
  • The next Bubble may be in the Long Term 10 yr to 30 yr Bonds where the Yeilds have shot up

What’s Gaelic and what’s Gallic ?

Gaelic is a Noun.It’s a Celtic language spoken in parts of Ireland and Western Scotland and even a part of Canada..It has three variants,Irish,Scottish and Manx…It was on the verge of fading out but there has been a revival of sorts and the Scotland Government is keen to support it’s existence….Barely 100000 people have some ability to speak this language…..As an adjective,Gaelic referes to ‘pertaining to the Gaels’ 

Gallic is an adjective referring to the French or France…However it also could refer to Gaul,a region in Europe that is traced to being largely a part of Modern France.It also could refer to a Gaulic Celtic Language spoken in Gaul before the Roman conquest

Remember Asterix the Gaul ! ..Asterix and Obelix feature in the hilarious Comic Series that pits their Village in Gaul against the Roman Might of Caesar…no matter how hard the Romans try,these shrewd villagers beat them at their own game 

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