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 !
As the Business is yet registering Revenues of over Rs 1200 crs for the nine months at December 31,2008 and has a target of US $ 400 Million for the full year,there is Life in this Business…What is the urgent need of the Hour is Financial Restructuring
The way I see it,the quickfix,however painful it appears in the short term,is to get ICICI Bank and other willing Pre IPO FII Investors to make amends and pump in Equity at the same high Premium that IPO Investors paid…They should raise atleast US $100 million and buy out the FCCBs at a negotiated Discounted Price…Yes,the Equity base may shoot up past Rs 500 crs,but the High Premiums would help in de-leveraging the company significantly…also ,if tenable and legally possible,the company should then explore reduction in Equity to below Rs 200 crs…I’m just thinking out loud ! Can Equity be set off against the Debit of the Translation Reserve ? It would be an Ideal Situation…No Fx Debt,A Reduced Equity and Removal of Reserve Debits of the Translation Reserve
Board of Directors of Firstsource Solutions …..Are you listening ?…you cannot let the Company Drift,living on just Hope and a Prayer.