FCCB issue to hit firm’s profits

Mumabi: Profits of Tata Motors, Mahindra & Mahindra and 13 other Indian companies may take a hit as foreign currency convertible bond (FCCB) investors may not convert their holdings into shares after a sharp decline in the Indian equity markets.

Ranbaxy Laboratories, Bharat Forge and others may have to take on more debt, raising interest outgo that may erode as much as 10 per cent of their profit, according to a report released by international brokerage CLSA Asia Pacific Markets.

A 16.4 per cent decline in the Bombay Stock Exchange's benchmark index, Sensex, since January has almost shut a route for Indian companies to raise money overseas.

Indian companies have raised invest $20 billion in the past five years by selling convertible bonds abroad. Most of these bonds are expected to mature in the next 18 to 24 months. Wockhardt Pharmaceuticals is due for redemption in October 2009.

If the stock market remains subued,0 it will stop the bond holders from opting for an equity conversion as it will be easier for them to buy the stock from the open market instead of paying the agreed premium.

Companies, including Subex, Firstsource, Aurobindo, Orchid, HCC, Hotel Leela and Bajaj Hindustan which have borrowed amounts that are 'significant in comparision to their size' face liquidity risks once these FCCBs come up for redempition, unless there is a significant rally in the stock price, the CLSA report said.

The liquidity crunch faced by these companies may have a larger impact on the stocks of the companies having outstanding FCCBs.

'If there are a few instances of non-conversion and liquidity problems for corporates as they try to refinance, market sentiment might turn negative for other companies with outstanding FCCBs as well,' Anshu Govil, an analyst with CLSA said in the report.

In the event FCCBs don't get converted, companies have the option to lower the conversion price in line with the market leading to higher equity dilution.

They also have the option to issue fresh convertible bonds at lower premium that may impact the earnings per share and again impact the existing equity holders.