Monday, May 30, 2011

FCCB - Redemption Pressure.

In the next few days, get set to witness a frenzy in the Foreign Currency Convertible Bonds (FCCBs) markets. It is expected to be making major news in the next couple of days.

The reason is simple. Maturity of FCCBs of around 100 companies is due between now and 2012. Ms Shyamala Gopinath, Deputy Governor, RBI stated that redemption pressures on account of FCCBs would start building up from current fiscal and peak till 2012-13. As per RBI, FCCB redemption profile is $3.622 billion in 2011-12; and $3.757 billion in 2012-13.

Now the problem is that when we say that FCCBs are nearing maturity, it leaves the companies with only two options – either buyback or repay the bond holders. And the problem being that majority of the company’s stock price, whose FCCBs are nearing maturity are trading lower than the price at which these bonds would convert into equity shares.

For eg: Rcom issued FCCBs and its conversion price is set at Rs.661 and today the stock is traded at Rs.85. Then there is Jaiprakash Associates, whose conversion price is at Rs.165 while it is currently traded at Rs.82.

The company can covert when the equation is vice versa from the current scenario – when stock price is more than the conversion price. But converting at such huge discounts makes no sense. Crisil has put out a report stating that only a handful of companies will be able to go for conversion and majority might have to repay the debt on maturity and that means the outgo of a huge amount of money. This repayment can be done with internal accruals of with more borrowings which in todays era will come with a huge interest tab.

Regarding buy back, we could see some serious rush in the coming days, from companies with enough internal accruals. RBI has extended the premature buy back via the approval route till 30th June 2011. Companies are allowed to buy back their FCCBs prematurely, financed by the company's foreign currency resources held in India or abroad. The only conditionality justifying the buy back using foreign currency held in India, including Exchange Earners Foreign Currency Accounts (EEFC) or foreign currency held overseas or raise fresh foreign borrowings, provided there was a minimum discount of 15% on the book value of the FCCB. Companies can also buy back using rupee resources, if there is a minimum discount of 25%, on the book value. The conditionality over ruling all this is that companies will use their internal accruals, which has to be certified by the statutory auditor.

There is one more option which companies might resort to. Making use of the reset clause wherein companies are allowed to reset their conversion price downwards. This in the immediate short term could see a further beating down of their share price, not to mention the fear of equity dilution. Suzlon, Tata Motors, Gitanjali Gem, Subex are some of the companies which reset their conversion price.

Given the current dismal market scenario, one should not be surprised if the RBI steps in and further extends the buy back deadline. The situation is grim, especially for those who have a weak balance sheet and are already leveraged to the hilt. Let us see how this cookie crumbles in the next couple of days.

Food for thought: Indebtedness is no virtue but repayment surely is.


Wednesday, May 25, 2011

Orbit Corporation Results.

Orbit Corporation declared its fourth results on Wednesday. Its revenues plunged 40% (QoQ) at Rs 68.12 crore for the quarter ended March 31, 2011. During the same period, the net profit declined 18% (QoQ) at Rs 19 crore, as against Rs 23.1 crore in the previous quarter.

As sales slumped at a fast pace in Jan-March earnings of the leading Mumbai developer, Pujit Aggarwal, managing director of Orbit Corporation, reasoned that the sluggish execution due to several commercial and regulatory norms have delayed supply by about 12-18 months.

"Although, volumes have dried up, but the appetite at reasonable price persists. Going forward, sales are likely to pick up by the festive season," he adds.

Below is the verbatim transcript of his interview with CNBC-TV 18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying video.

Q: Your company's earnings look quite bleak, reporting the lowest revenues compared to many quarters now. Is there a sharp reduction seen in sales velocity?

A: The reduction in numbers has been primarily on the account of the fact that the regulatory environment has not been conducive in Mumbai. So certain projects where we had sales have not been recognized because of the inability to achieve the 25% milestone, the threshold required for recognizing those revenues. Hence, has been poor and that’s the fact of the matter.

Q: How much of that would space over into FY12? For this year what would you intend to do at least on the sales and volume off take front in the first half?

A: We have about Rs 850 crore of sales, which has already taken place and it’s not yet been recognized. The outstanding order books size exists at about Rs 800 plus crore. A substantial part of it would get recognized in this particular financial year. Clubbing everything to our current sales, we expect to start clocking in gains this year and post better result in the next year

Q: Tell us a little bit about realizations- Traditionally, Mumbai has been quite a resilient market but we have seen some sort of a dip in realizations for a couple of quarters. How do you hope to stabilize it in FY12?

A: Unfortunately, the prices have been moving up as because project launches have been few; the supply position is poor and it’s bad. Therefore, on one side the sales are weak because the environment is not very conducive. People are not in the mood to buy. On the other hand, prices are not coming down because supply is limited.

As far as pure sales are concerned, we have clocked sales at about Rs 60,000-65,000 in areas like Napean Sea Road, approximately 10-12% more than what we did in the previous quarter. In Lower Parel, the average sales price reported was over Rs 19,000-20,000 and we have been selling at Rs 21,000 – 22,000. In suburbs, where we earlier sold at Rs 9000-9500, we are now selling at about Rs 10,000-10,050.

This adds 5-10% increase across all segments in this quarter. Hence, the prices have not come off. Also, the regulatory environment in Mumbai is easing out as the parking lot FSIs and many other things have been cleared up by the government.

Q: The problem is not just diminishing sales, it’s also debt levels. Given your outlook in terms of FY12 sales off take, how much do you think you can scale down debt concurrently with that?

A: We have debt of about Rs 800 crore excluding the CCDs. Those CCDs have got converted in May. Therefore, it will remain at Rs 800-805 crore levels. Yes, debt is a bit of a concern because the cost of debt has also gone up from 13.6% to 14.1%. Hence, it is going to affect bottom-lines. However, the EBITDA margins as compared to the previous year have gone up. We were working on an EBITDA margin of about 30%, now it’s gone up to 37% this yea, a 7% increase on better sales realizations, better prices. Also, we have been able to cut down on few costs from the construction side.


Tuesday, May 17, 2011

SBI Results.

The market remained in the red, lackluster, aimless and without direction. Then came the real bad news which the market was looking for. The poor performance of SBI. The largest PSU bank of India showed a pitiable Rs.21 crore net profit for Q4FY11. One can never fathom that a bank of the size and stature of SBI will come with such a small net profit. Numbers were expected to be under pressure, but no one expected it to be so bad. Higher provisioning did it in.

Total provisioning stood at Rs.4157crore v/s Rs.2349 crore (YoY). Provisioning for NPA was at Rs.3264 crore v/s Rs.2187 crore. Net NPA was at 1.63% v/s 1.72% and Gross NPA 3.28% v/s 3.05% (YoY). What also added on to the shocker was the NII, which rose 20% at Rs.8058 crore as against expectations of a rise of at least 35%. Worrying is the fact that NII, sequentially was down 11%. This provisioning does seem like a one-off but what does come our clearly is that there are some tough times ahead. The market has taken these numbers pretty badly as it looks upon SBI like a barometer for the entire banking sector and if these are the signs coming from SBI, the sector is surely looking at some major speed breakers ahead. The word on the Street is that smaller and private sector banks might not get impacted as much but banks dependent on corporate loans, like SBI, is sure to face some trouble. The only silver lining here is that thankfully, the numbers of SBI came in so late; if SBI had been the first to announce its numbers, markets would have written off the entire banking sector much earlier, turning a blind eye to all the good numbers too.


Monday, May 16, 2011

REVERSE REPO Rate - History


(Since 2005)      %

29-Apr-2005       5.00

26-Oct-2005       5.25

24-Jan-2006       5.50

8-Jun-2006        5.75

25-Jul-2006        6.00

8-Dec-2008        5.00        RBI announced on 6/12/2008

5-Jan-2009        4.00        RBI circular dated 2/01/2009

5-Mar-2009        3.50        RBI circular dated 4/03/2009

21-Apr-2009        3.25        RBI circular dated 21/04/2009

19-Mar-2010        3.50        RBI circular dated 19/03/2010

20-Apr-2010        3.75        RBI circular dated 20/04/2010

02-July-2010        4.00        RBI circular dated 02/07/2010

27-July-2010        4.50        RBI circular dated 27/07/2010

16-Sept-2010       5.00       RBI circular dated 16/09/2010

02-Nov-2010       5.25       RBI circular dated 02/11/2010

25-Jan-2011        5.50        RBI circular dated 25/01/2011

17-Mar-2011       5.75       RBI circular dated 17/03/2011

03-May-2011       6.25*       RBI circular dated 03/05/2011*

*[Till 03/05/2011, reverse repo rate was an independent rate and announced by RBI. However, in the monetary policy announced on 03/05/2011, RBI has decided that now the reverse repo rate will not be announced separately, but will be linked to Repo rate. Reverse Repo rate will be 100 bps below the repo rate]


Real estate draft Bill.

In order to make the Real Estate Draft Bill a central legislation from being a state matter now, the contour of the Bill has been changed, reported financial daily Business Standard.

The report said that the focus of the revised Bill is now on consumer protection and contractual obligations of developers. The Ministry of Housing and Urban Poverty Alleviation has sought the approval of the Ministry of Law on the proposed legislation.

The law ministry is likely to give its opinion by the end of this month. The concept of a real estate Bill has been around in the government for almost 10 years now, and a draft Bill has been in the making for well over two years.

A senior official in the housing ministry told the newspaper that although the Consumer Act and penal provisions already exists for grievance redressal, these come into the picture only after commitment is made by developers to property buyers.

The disclosures must be made before launching any project, so that consumers are not taken for a ride at a later stage. Also, developers have to register themselves with the regulatory authority.

The newspaper shares that certain clauses have been deleted from the original draft of the real estate Bill in order to move it towards a central legislation. An official confirmed the newspaper that the state-centric issues such as building bye-laws and municipalities had been removed from the new draft. The push now is said to be on consumer protection against fraud, timely completion of projects by developers, and contractual obligations of the builder/developer, the report held.


Saturday, May 7, 2011

Maharastra FSI Hike Soon.

The Maharashtra government is likely to raise the floor space index (FSI) for suburban houses perhaps by 0.33, reports CNBC-TV18’s Priyanka Ghosh.

The current suburban FSI is that 1 and on top of which 1 of TDR can be loaded. Now the government is
saying that of the one TDR that can be loaded on top of one FSI by 33% from us and by 66% or thereabouts from the supply side companies. Obviously this means that this will hit the volume of TDR that a supplier can actually sell which namely is going to impact HDIL because it controls about 90% of the market on the supply side.

The price at which they can sell TDR will also have to be reviewed because now there will be another supplier in the market which is the government itself. The government has said that it is going to utilize the fund in building infrastructure for the city.

Now when the government had first come out with this rule in 2008, there was subsequent public interest litigation (PIL) in the High Court. The High Court stayed the order last year. This might actually get into a cyclical kind of litigation. Also, the supply side companies have been very strong lobby and they have tried to hinder this legislation from coming into being for a very long time.

The general consensus in the market right now is that this will actually go through. The government will perhaps effect this legislation at this point in time but will it actually be implemented or will it again get into some kind of litigation one does not know.

The companies that will be impacted on the supply side: there will be HDIL quite significantly, DB Realty, Ackruti City.

On the buy side, Oberoi Realty, Orbit Corporation though not too much in the suburbs, Indiabulls, these might actually be the beneficiaries of this move.


Friday, May 6, 2011

Taxation on GOLD ETF.

What is the tax implication when investing in gold ETF?

When computing income tax, gold exchange traded funds are treated as debt funds. Hence, on redemption, the units of gold ETFs held for more than a year qualify for a long-term capital gain tax of 11.33 per cent without indexation, or 22.66 per cent with indexation. If the period of holding is less than a year, the short-term capital gain will be clubbed with the income of the individual investor, to be taxed as per the applicable tax slab of the investor.