Monday, August 31, 2009

Are we done going higher?

Are we done going higher?

That was the question Jim Cramer asked viewers of his "Mad Money" TV show Wednesday, as he responded to colleague Doug Kass' call that the market has peaked. Cramer said there's no reason to panic or to "sell, sell, sell," but there's always room for differing opinions.

According to Kass, the market's done going higher. He cites earnings, which were met only with cost cuts and job reductions, as one major concern. Kass said that the market could be headed for another sizable collapse with the muted recovery in housing, increased consumer borrowing and a ballooning federal deficit.

Cramer said when investors come across a viewpoint that differs from their own, they shouldn't dismiss it, but instead embrace it and study it. He said from his vantage point, things are improving. He said there isn't much inflation, the major job cuts are over, and Ben Bernanke will continue to lead the financial system back from the dead.

According to Cramer, the markets will not see Dow 10,300 anytime soon, but will likely pull back 3% to 5%, before resuming an upward trajectory.

He reminded viewers that September is historically unkind to the markets, so if they have big profits, they need to ring the register and raise cash to buy back in at lower levels. Cramer said investors need to prepare for a "business as usual," garden-variety market correction.

On a final note, Cramer told viewers that there was one area of concern for the markets, and that's job creation. He called job creation the markets' Achilles heel. Without job creation, he said, the markets cannot go higher from these level.


Buyback of foreign currency convertible bonds (FCCBs

While in the near term, FCCB buybacks may help improve earnings, marking up equity valuations of companies based solely on this aspect may not be prudent.

Buyback of foreign currency convertible bonds (FCCBs) by companies has been the most frequently announced corporate event at the bourses in recent months. From large companies such as Reliance Communications and Suzlon Energy to the smaller ones such as Orchid Chemicals and Kalindee Rail Nirman, all have been equally interested in FCCB buybacks after the RBI eased norms. .

While the trend appears to be gaining momentum with a number of companies hopping on to the buyback bandwagon, the quantum of purchase so far has been modest.

But of what significance are these buybacks for investors? Do they signal improving or deteriorating fundamentals? And importantly, why haven’t these buybacks garnered the overwhelming responses they were expected to? Read on to find out.

The brass tacks

FCCBs, which are debt instruments that come with an option to convert into equity, have been the most sought after means of raising cheap credit (zero or low coupon rates) by corporate India in recent years.

Over the last five years, corporate India raised as much as $20 billion through FCCBs alone. However, after the equity sell-offs last year shut the equity conversion option for the bondholders, these outstanding FCCBs in the books may snowball into gargantuan debt. Elsewhere, widening international credit spreads on Indian debt and the heightened risk aversion among global investors (typically the holders of FCCBs) led to massive discounts on these bonds; with some trading at discounts of 50-60 per cent.

Reliance Communications bought back the first tranche (in December 2008) of its FCCBs, when the latter were trading at a discount of over 52 per cent. Financial Technologies, on the other hand, executed its bond buyback at an average discount of over 37 per cent in Feb-March 2009.

Sensing the gravity of the situation, the Reserve Bank of India, last December, stipulated that corporates could buy back their FCCBs using their forex resources held in India or overseas or even raise fresh external commercial borrowings (ECBs), provided the buyback price was at a minimum discount of 15 per cent to the book value of the FCCB.

It later eased the criteria and stipulated that companies could buy back their FCCBs from internal accruals with a minimum discount of 25 per cent of book value for redemption amount of up to $50 million, 35 per cent of book value for redemptions of $50-75 million and 50 per cent of book value for amounts between $75 million and $100 million.

Despite this allowance, so far (up to April 15) the central bank has approved only 18 proposals for buyback of FCCBs involving $765 million, with the discounts ranging from 25 per cent to 50 per cent. Here’s why.

Challenges Galore

ECB isn’t easy: The solution in this case also presents the problem. While the RBI has allowed companies to access external commercial borrowings to buy back their bonds, the overwhelming risk aversion among international lenders has been playing spoilsport.

Besides, as FCCBs of only those issuers hit by the downturn are trading at a discount, such companies may not be able to raise fresh ECB at competitive rates. These companies can, however, use their existing forex reserves held in India or overseas for the purpose. If that’s not a possibility, raising fresh ECBs isn’t easy, as debt programmes of most Indian companies have (for the same reason) not taken off well enough to make bond buybacks viable. The negative outlook on India’s sovereign credit rating by S&P (currently at BBB-) also adds to the hurdle.

Even if companies succeed in finding a willing lender, the challenge lies in conforming to the RBI pricing norms as well. While easing the buyback norms, the RBI had said that where fresh ECB was for less than three years and for the same period as that of the outstanding maturity of the original FCCB, the all-in-cost ceiling should not exceed six months Libor plus 200 basis points.

While such a norm dissuaded companies from exploiting the ECB option (as the prevalent rates are pegged at Libor+700-750 bps for most Indian companies), with credit markets now beginning to ease up and S&P considering a revision of India’s credit rating (once the next government outlines its fiscal policy), companies may consider the ECB option seriously. That in March alone, five companies lined up for ECBs (about $105 million) to fund their buyback programmes validates this.

To buy or not to buy: But if raising commercially viable ECBs has been out of reach, the other option, of digging into cash coffers, hasn’t been any easier.

The RBI’s stipulation of using internal accruals to buy bonds has also restrained participation, going by the sheer lack of companies that can boast of healthy internal accruals. Besides, most of these cash-strapped companies are currently more in need of funds to keep their business afloat.

Indian corporates increasingly need more money to fund their greater-than-before level of inventory, and receivables and lower credit periods. This presents a challenge, as the final decision to buy back FCCBs will depend on whether companies use the money to actually buy back the bonds or plough it in the business. So far, of just under a score of companies that bought back FCCBs, barring a couple, the others all relied only on internal accruals. Nonetheless, regardless of the bond discounts or cash availability, companies have had to pare gains as rupee depreciation has also taken away benefits, since repayments have been made from cash-flows.

Riding on buybacks

Immediate gains: Not only does the ability to buy back bonds from internal accruals reflect positively on the companies’ cash positions, it also bestows them with near-term gains on two counts. For one, their immediate earnings get a boost from the significant one-time gain accruing from the deep-discount debt payoff.

For example, for the quarter-ended March 2009, Moser Baer’s standalone profits of Rs 43 crore were helped by an exceptional gain of Rs 98 crore, largely due to FCCB buyback.

The other benefit, however, accrues only to companies that have adopted AS11 (without the recent changes). These companies, on buying back their bonds can, to the extent of the buyback, do away with the practice of marking to market their losses on such FCCBs.

For instance, Jubilant Organosys, which is AS11-compliant, posted extraordinary expenses of Rs 37 crore, net of the MTM losses of Rs 101 crore and gain on FCCB buyback of Rs 59 crore. Have stock markets too, recognised the benefits of the buybacks?

Stock gains for the companies that have executed buybacks have been a function of both the degree of discount as well as company fundamentals. For instance, while First Source Solutions (FSL) has appreciated by over 52 per cent since it first bought back its FCCBs, the stock price surge was only 15 per cent in the case of of Hotel Leela. For FSL, the bonds were bought at a discount of about 50 per cent and that too when ballooning debt was the bigger concern regarding the company. However, for Hotel Leela, not only was the discount detail not known, there were also looming concerns on the company’s profit growth. Besides, the company had earlier even lowered its conversion price.

What about valuations?: While in the near term, buybacks are money-spinners, marking up equity valuations of companies based solely on this aspect may not be prudent. For one, companies so far haven’t retired a massive portion of their overall debt.

Jaiprakash Associates has so far repurchased and extinguished only 10 per cent of the zero coupon convertible bonds worth $400 million due 2012. Though the bonds were bought back at an average discount of 47 per cent, implying savings of about $35 million, it is still under 3 per cent of the company’s total debt.

Second, most companies also have other significant business/financial concerns weighing on their stocks. But if the buybacks are substantial and improve the corporate’s credit profile, it may be followed by a fair amount of stock price re-rating. For instance, the stock of 3i Infotech bounced up by over 44 per cent after its first announcement of FCCB buyback.

The company earlier (in 2007-08) had about Rs 667 crore as outstanding FCCB, which was roughly over 1.2 times its net worth then. But last month alone, 3i Infotech bought back about 13 per cent and 27 per cent respectively of its €30-million and $100-million FCCBs due 2012.


Friday, August 7, 2009

Unemployment Numbers.

The official national unemployment rate dropped to 9.4 percent in July from 9.5 percent in June, the Labor Department reported Friday, even though the economy lost 247,000 jobs.
Q: How can the unemployment rate drop while the economy still loses jobs?
A: The two indicators come from different surveys. The unemployment number is based on a survey of households -- in which the government asks people whether they have a job or want one. The jobs survey asks employers how many workers are on their payrolls. In July, the household survey showed that the labor force declined by 422,000.
Gary Steinberg, spokesman for the Labor Department's Bureau of Labor Statistics, explained: "If the labor force is 100 people and 10 are unemployed, the unemployment rate is 10 percent. If the following month the labor force is 95 and the number of people unemployed is nine, the unemployment rate is 9.5 percent."
Q: So why is the labor force shrinking? Isn't the U.S. population still growing?
A: Yes. And this gets to the heart of the way the Labor Department counts unemployment, which is not without controversy. The monthly count is based on a rotating survey of 60,000 homes, which statistically represents the U.S. labor force of 154 million. That is not the controversial part; that is standard and accepted statistical method.
The controversy is this: In the survey, the Labor Department only counts you as unemployed if you meet a number of tests, including whether you actively looked for work in the four previous weeks. If you did not -- and even if you do not have a job -- the Labor Department counts you "marginally attached" to the labor force and not part of the official monthly computation.
The Labor Department does, however, take note of you and includes you in another monthly unemployment number -- which some believe paints a more accurate picture of the economy -- that includes everyone who should have a full-time job but does not. These include the "discouraged," who have given up looking for work and those working part time who would rather be working full time. For July, this number was 16.3 percent, down from a recent-history high of 16.5 percent in June.
Q: How high will unemployment rise?
A: Everyone has a guess. Earlier this year, the White House predicted unemployment would top out at 8 percent. But earlier this summer, President Obama said unemployment would top 10 percent before going down. That's in line with what mainstream economists are saying.
Q: Does Friday's unemployment number mean that the recession is over?
A: We will not know for a while. Many economists believe it might be but more data are needed to be sure. In the first quarter, gross domestic product shrank at a rate of 6.4 percent. In the second quarter, the economy shrank only 1 percent. So it is going the right way. But in the seven U.S. recessions since 1970, unemployment continued to rise for months after the recessions ended. For instance, unemployment kept rising for well over a year after the 1991 recession ended.

The Innovators: Winning the Productivity Game.

In the 1960s when manufacturing dominated the world's economy, Edward Deming, a New York University professor, noticed that manufacturers resolved problems as they occurred, but there was no system for continuously improving manufacturing performance.
In response, Deming developed "Statistical Process Control." He tried and failed to sell it to U.S. auto companies, but found enthusiastic supporters in Japan's central government. Japan's unprecedented transformation from cheap goods to best-in-the-world manufacturing is largely attributed to Deming. Still today, Japan's top corporate award is, "The Deming Prize."
By dramatically increasing manufacturing productivity, Deming improved the standard of living for every Japanese citizen.
Fast forward to 2009. Think Microsoft(MSFT Quote), Thomson Reuters(TRI Quote) or even Orkin. Each of these companies is essentially a collection of leased buildings and people. What is the system for improving productivity in these pure human capital plays?
With 75% of GDP from advanced countries now coming from services it is time for a fresh approach to productivity improvement -- one that is focuses on workforce capabilities.
Like Japan in the '60s and '70s, America's standard of living depends on productivity growth. But we have a problem -- our comparative advantage is eroding. The Conference Board reported that 2008 productivity growth from emerging economies was 5.5%, down from 8.3% in the BRIC countries for 2007.
This sustained growth, largely attributable to investments in state-of-the-art manufacturing processes and technologies, far surpasses the growth rates from advanced counties such as the U.S. (1.7%), Japan (0.9%) and the European Union (0.2%).
In summarizing the productivity challenge of today's service-intensive economy, The Conference Board concludes, "Innovation remains a crucial trigger for growth and recovery. But it requires continued investment in capital and labor -- iincluding management and workplace practices, organizational structure, technology applications, and human resource strategies...."
What are your company's productivity-enhancing "workplace practices" and "human resource strategies"? The annual employee survey? Your new five-point performance appraisal scale? More likely than not, over the past 12 months your workplace practice of choice has been downsizing.
Downsizing often does improve output per hour, but how does it affect growth? The Economist reports that 2008 patent filings, an important indicator of innovation and growth, dropped from a three-year average growth rate of 9.3% to 2.4%. As in past downturns, mass layoffs will likely reduce mid- and long-term productivity by suffocating risk and innovation.
What must U.S. companies do to drive productivity and revenue growth? Build and manage a comprehensive, disciplined system for improving workforce capabilities and outputs. Then assign it, with metrics and review dates, to an executive team member. Don't look to HR for a solution; today's HR programs are not designed for productivity improvements. It's time to build a new model that "bends" the curve on workforce productivity. Here are three components to consider.
Effective Executive Teams
Executive team performance may be your organization's biggest productivity lever. Effective executive teams choose a differentiated business strategy and then design an organization that efficiently delivers that strategy.
Successful executive teams know the answer to the question, "Are the outputs of our team 'better' than last year?" That answer is knowable. Ask team members to define the four or five outputs for meeting the organization's financial targets. "Create a compelling strategy" might be one. Then have team members define level 1, 2, and 3 performance for each. Finally, as a team, assess performance every six months.
"When people in our most important positions outperform their competitor peers, we win." Let's be honest -- not all roles are equally important to the bottom line. At Kraft(TRI Quote), brand managers are critical; at Coldwell Banker, it's the real estate office manager. Choose two or three roles with the biggest impact on customer and shareholder satisfaction and build a complete system that ensures year-over-year performance improvements. Here's how:
Clarify success measures for the role (i.e., lagging indicators of performance). This unambiguously answers the question, "How am I doing?"
Define the four to five most important activities for each role. Get rid of your over-engineered competency models. Determine the four or five things your top 5% do each week and find out how they do it. For sales managers these might include maintaining a full pipeline, improving executive positioning and upgrading sales capabilities. For real estate managers it includes agent recruiting and community relationships.
Assess incumbents and move low performers. Assess incumbents on each success measure and on each activity. Transfer or terminate individuals who will not be considered A or B players on the open market.
Design HR systems to improve performance on the key activities. Align all HR systems to the five activities (e.g., selection, training, appraisal, career paths, base pay). For example, use top 5% practices to create training content for the major activities. Eliminate all training that does not drive performance improvements on the major activities. Want a mini-MBA? Pay for it yourself.
Define your company's culture in business terms and behaviors. When IBM(IBM Quote) reset its culture, it held a 72- hour "values jam" (like a jazz jam session where everyone gets to play). IBM employees set a very clear set of business focused values: Dedication to every client's success; innovation that matters for our company and for the world; and trust and personal responsibility in all relationships. Once the values are clear, assign a leader from the executive team to lead and report progress every quarter. IBM did this by assigning culture to the Senior Leadership Team, a working group of the "best" 300 leaders at the company.
Deming changed the world by building a system that drove step-function improvements in manufacturing productivity. Toyota(TM Quote) adopted Deming's system; General Motors did too, but a decade too late. In today's service-rich economy a new productivity system is needed - one that focuses on human capital. Like Toyota and GM, the winners will get there first.


Sunday, August 2, 2009

Conoro Updates.

Operations update

The Amguri A-14 well was drilled and completed within the Tipam sand in late 2008. Initial test results indicate that the well is capable of flowing over 6.0 million standard cubic feet per day ("MMcf/d"). No signs of depletion were apparent from the pressure build-up analysis.

The pipeline for the Amguri A-14 well tie-in into the central process facility was completed at the end of May 2009. The well was put into production on 2nd June at an initial rate of 1.0 MMcf/d (0.6 MMcf/d net to Canoro) dry gas on a 10/64" choke with a with a tubing head pressure of 2180 psig (shut in tubing head pressure was 2200 psig). The rate is expected to be increased up to 4 MMcf/d (2.4 MMcf/d net to Canoro) in conjunction with the demand for gas from the local tea gardens that occurs during the six-month growing season starting in late June. Prior to bringing the A-14 well on production the Amguri field was producing 4.1 MMcf/d (2.5 MMcf/d net) gas with an associated 300 barrels per day ("bpd") (180 bpd net) of condensate, or 590 barrels of oil equivalent per day ("boed") net to Canoro. Production has been restricted pending the installation of the condensate recovery and gas compression facility. The facility, which is primarily comprised of gas compression for injection and condensate stabilization, is on schedule for Q1 2010 commissioning. All major pieces of equipment have been ordered and are in the manufacturing process. Construction is anticipated to commence in Q4 2009.

The Amguri A-11 well is planned to be converted from a Main Barail gas producer to a dual completion well for gas injection into the Main Barail and production from the Mid-Barail formations by the end of Q3 2009. Subsequent to recompletion, the well will be produced solely from the Mid-Barail formation. The conversion is not expected to add significant incremental condensate daily production, but designed to preserve the reservoir pressure in the Main Barail zone until gas injection is implemented for optimal recovery of condensate reserves.

The planned installation of an electric submersible pump (ESP) in the Amguri A-5 oil well, brought back on stream in early 2009, has been postponed while watercut performance is being evaluated. The well had been producing approximately 30 bpd of oil net to Canoro prior to being shut in due to water influx. Canoro is currently reviewing the reservoir and well characteristics to determine the feasibility and options for a water shut-off work over.

Work continues on the Pre-Stack Depth Migration ("PSDM") re-processing of Amguri 3D seismic data with initial results expected in Q3 2009 and subsequent re-interpretation being completed in Q4 2009.