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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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Switch from Chanda to Shikha ! ? from ICICI Bank to Axis Bank !?

Now this is an intriguing switch to consider ! From Chanda to Shikha ?

Just this morning I was conversing with an ex commercial editor of a Newspaper….we were discussing how the Media today is corrupt and deliberately mislead investors with guided opinions by experts and planted stories….in fact he was bold enough to even accuse a leading National Daily of being a prostitute !…where every inch of the paper is up for sale !

When suddenly he popped an intriguing question….Should one switch from ICICI Bank to Axis Bank ?…An immediate reaction was that it becomes a choice between the two Managing Directors,Chanda Kochhar of ICICI Bank and Shika Sharma (ex-ICICI) of Axis Bank !

Now’s this is an interesting switch !

ICICI Bank closed at Rs 843 today and Axis Bank at Rs 914

Chanda Kochhar has been elevated to the hot seat and is trying to turnaround the Bank’s standing…last week she was angrily defending loan transfers to ARCIL as being genuine save a few where frauds were detected…she accused a rival bank of spreading malicious rumours that such fraudulent loans ran into hundreds of crores…last year she defended the bank’s creditworthiness and financial stability because of exposure to sub prime overseas Investments and the quantum of Loans that were non performing assets ..again here ICICI Bank had complained to SEBI and even filed an FIR that there was a leading Broker behind the crash in the share price of ICICI Bank….he had send out by SMS adverse rumours about the Bank to over 30000 mobile phones…If you recollect,the ICICI Bank Share Price had dived close to Rs 300 in September 2008 from over Rs 600 levels and Chanda Kochhar very courageously came on TV several times to allay fears by giving specific details and quantum of the default accounts and Investments..The Share Price has since regained lost ground

Shikha Sharma lost out to Chanda Kochhar to head ICICI Bank…she exited the Group and was appointed MD of rival Axis Bank….The Bank has just concluded successfuly a QIP at Rs 906….these two seem to be fighting it out on the bourses too !

Many view Axis Bank as a better prospect than ICICI Bank  on most fronts…so the switch should very much be a serious consideration if you do not want to increase sector exposure and have both these banks in your Portfolio…Chanda may well demand “Switch from Axis and Shikha to ICICI Bank and me !”…Equity is not just clockwise thinking ! 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

Educomp’s Share Price Slumps as Bears orchestrate a Mauling

Educomp appears to be a victim of Bear Market Manipulation…After Satyam,the Markets have been expecting some more companies to be exposed….So when the Daily Pioneer came out with an adverse story on Educomp and it’ Promoters,the Share price simply collapsed to a low of Rs 1375 yesterday from above Rs 2100 on January 19,2009…Check out this story on

The journalists have raised questions on a host of issues…one of them is that the Promoters have made a lot of money by trading in their own shares between 2006 and 2008

First and Foremost it is not illegal for a Promoter or Top Manager or Director to reduce his Holding.A M Naik,CMD of Larsen,Narayan Murthy of Infosys….they all have sold off some part of their holdings to arrange Funds that they may have needed or to balance their portfolios …it may also have been that they may have thought that the Share price had run away too much ahead of Fundamentals and so they took advantage by selling…There is nothing wrong in this,unless it is out of the Ordinary

In this Context,Educomp’s head,Shantanu Prakash has come forward on business channels and frankly answered a lot of questions…he has also lodged a complaint with the Economic Offences Wing that somebody is out to create panic for Educomp Share prices and is spreading rumours to bring the Price down

If you recall,a few months ago,ICICI Bank share Price too had tumbled overnight and MV Kamath had filed a Complaint with the Police as well as with SEBI that some sub broker had send out 30000 smses bearing adverse new of ICICI Bank…The objective was that a ‘cartel’ wanted to bring the Share Price down…SEBI investigated but reported that there was no evidence of such a wrong and illegal practice 

Interestingly Wall Street Journal just carried a topical article that warns that White Collar Crimes may jump significantly this year as economic and financial market turmoil lead many to deviate from moral and proper activities to keep up the revenue stream or make a quick buck.

It refers to a ‘Global Fraud Report’ just released by New York based Risk Consultancy Firm,Kroll Inc.It warns of unscrupulous form of short selling where brokers and traders form ‘loosely organised cartels’ to start negative rumours about a company whose shares they are betting against

What happened or is happening to Educomp may just be this ! read more

ICICI Bank Jt MD ,Ms Chanda Kochhar comes on CNBC to reassure

ICICI Bank’s Jt MD and CFO,Ms Chanda Kochhar just appeared on CNBC in a call in converstaion with the Anchors…Clearly through all her calmness and reassurances there was an underlying and urgent  plea to Depositors and Shareholders and Investors not to Panic and fall prey to the rampant rumour mongering going on

With the Share Price of ICICI Bank already being mauled over the past few weeks and dangerously plunging by an unprecedented 26% today to record a low of Rs 326.70 on BSE and threatening to drop even lower it was absolutely imperative that Depositors and Investors in ICICI Bank needed to know what was happening !

Ms Kochhar defended her bank revealing  that it had

  • A Balance Sheet Asset Strength of Rs 484000 crs
  • A Networth of Rs 47000 crs
  • Liquidity of Rs 12000 crs
  • No real increase in NPAs…
  • An under 10% of Total Assets Exposure in  Global Loans…and even some difficult loans were adequately backed by cash and other collaterals
  • Adequate Profitability

Ms Kochhar said her forthcoming quarterly results will also reassure everyone on the continued  and adequate profitability of the bank

ICICI Bank has since recovered smartly to Rs 370 at 2 pm now

Globally the whole Banking Sector is witnessing A Great Crisis in Confidence and any exposure to troubled and bankrupt corporates and banks and financial houses around the world is played up more than hundred fold as murmurs and rumours grow and spread like wildfire

Clearly ICICI Bank is a victim of this…Ms Kochhar assures us that in the overall context of the size of the Bank it’s troubled exposures are not significant

A few years ago,I recall ex Fed Governor,Alan Greenspan,reassuring the Finance Committee of the Senate that any risk on Mortgage Lending was Low and manageable…What followed  is now history which we are living !

Let’s pray that Ms Kochhar’s conviction in the strength of her bank is correct and not misleading and that the bank does not leak any more holes than we are currently aware off

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