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A Lion’s eye on the Bulls and Bears

“In India, companies may fall sick, but promoters rarely do!”

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Wicked ! Wicked ! Wockhardt on a Wednesday Morning !

Wockhardt continues to be Wicked…. dropped over Ten percent this Wednesday Morning to Rs 71 levels….Shareholders who believed in the Khorakiwalas have been clearly betrayed

Khorakiwalas had been on an ambitious acquisition foray,creating a global footprint by buying out companies in USA and Europe…It bought out

  • Pinewood Laboratories of Ireland for US $ 150 Million in October 2006
  • Negma Laboratories of France for US $ 265 Mllion in March 2007
  • Morton Grove Pharmaceuticals for US $ 38 Million in November 2007

It leveraged it’s Balance Sheet sizeably to fund these plans.The Debt is Rs 3400 crs as on December 31,2008 with a Debt/Equity ratio of a very high 2.3 in current credit contraction circumstances.The Networth is Rs 1480 crs  and the Market Capitalisation has sunk to Rs 850 crs this morning

Wockhardt is also one of those unfortunate companies who took the FCCB route to raise capital.US $ 169 Million of this is yet outstanding and US $ 110 Million is payable in September this year…no possibility of conversion as the Conversion price is Rs 629

Last year it’s Wockhardt Hospitals Public Issue was withdrawn citing poor market conditions.This forced the Khorakiwalas to pledge 43.1% of their 73% holding in Wockhardt to raise Rs 350 crs for the Hospital…It is now trying to get in a strategic Investor…but poor valuations are a hindrance.

The Company has announced it will be beginning a CDR Exercise through ICICI Bank

A few years ago ,Wockhardt was involved in a major Billion Dollar acquisition plan in USA…It failed but the Khorakiwalas disclosed over Rs 50 crores spend in the effort…They refused to divulge the details…at the time I had said if this was the level of Corporate Governance on Disclosures then it would be better that Shareholders exit…The Share Price was then in excess of Rs 400

This morning,Ashok Wadhwa of Ambit Holdings came on CNBC TV 18 and was asked his view on Wockhardt…he says that Wockhardt has good management,good distribution and good research and this excessive leverage issue could have happened to anybody in any industry…and that they will come out of this….Well,he should have disclosed whether he has or has had  or was endeavouring to have any business relationship with the Wockhardt Group…..I tend to disagree with Wadhwa…The Promoters have clearly not been Investor and Shareholder friendly….and I daresay even Employee friendly ! There has been lack of Transperancy and Accountability …..Carol Infotech,now Wockhardt Life Sciences,being a case in Point….When they’re up against the wall now they have little option but to come clean on a host of issues and admit that they are collapsing under the weight of High Debt ! read more

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

Firstsource Solutions from the ICICI Stable sinks below Face Value Rs 10….Why !?

Thx Anup for your response in the earlier Larsen Blog where you also requested for my view on Firstsource Solutions as it’s share price sunk to Rs 9.75,below face Value of Rs 10 for the first time ever 

I hope this blog gives you some clarity on this Company

It was clearly an Opportunistic IPO at a Heavy Premium in Bullish Times….Despite a Networth of just Rs 100 crs,excluding Goodwill,Firstsource Solutions managed to raise Rs 384 crs ,offering shares at a Price that was nearly 30 times the Earnings

Even the Objects to the Issue were General…Rs 180 crs for Acqusitions that were yet to be identified,Rs 45 crs to repay a Loan from ICICI Bank.Rs 46 crs for creating New facilities,Rs 89 crs for General Corporate Purposes and Rs 24 crs for Issue Expenses 

Two years ago on January 29,2007, ICICI Group promoted,Firstsource Solutions, came out with it’s IPO at Rs 64 ( Face Value of Rs 10 + Premium of Rs 54).IPO Size was Rs 443.50 crs with a fresh issue of 60 million shares and an offer for sale of 9.3 million shares by Promoter, ICICI Group 

The issue received an overwhelming response and was oversubscribed 40 times….with the QIB Portion @ 71 times,Retail portion @ 11 times and Non Institutional category @ 40 times

It was listed at Rs 90 on February 22,2007 and reached a high of Rs 93 on May 15,2007…Since then it has drifted lower and lower….As of December 31,2008,It’s Shareholder Pedigree boasts the likes of ICICI Bank Promoter group ( 26.74% stake) and Aranda of the Temasek Group,Metavante,WestBridge,Galleon Group,Seacrest ( collectively holding 55.33%)

What has hit this pure play BPO Outfit ?……It’s simply the FCCB Exposure of US $ 275 Million and the effect of the Rupee Depreciation on it that is causing the sickness

The company has adopted AS 30 in FY 09 from July 1,2008 much before it becomes mandatory in FY 2012.It has designated the FCCB as a Hedging Instrument for it’s Net Investments in Non-Integral Foreign Operations.This requires it to debit any translation loss on the FCCB in event of the Rupee Depreciating to  a specially denominated Transalation Reserve and not through the Profit and Loss A/c…However the difference between the Fair Value of the Debt and the carried Value should be written off in the P & L A/c.Also any premium or discount on Forward contracts on hedged positions should be routed through the P & L A/c .Premiums to be paid on redemption have to be amortised over the life of the bond against the Share Premium Reserve  read more

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