Oct 4, 2005|
FCCB: Is it beneficial for shareholders?
In the last two years, almost all the top corporate houses have raised debt (FCCB issue i.e. foreign currency convertible bonds). This has been for the obvious reason of savings in interest costs (by way of lower interest rates). To give a perspective, while the LIBOR rate (rate based on which the interest component is determined in overseas market) is around 3.5%, the prime-lending rate (rate at which the domestic banks lend money) is at about 10%. Indian companies, which raise funds in overseas markets, provide a 'sweetener' of converting the loans into equity share capital to the lenders. In this article, we try to look whether these 'sweeteners' are in favour of the existing shareholders.
For the purpose of this article, we have considered the financials of Tata Motors for the year FY05. Further, we have also altered the interest cost and the paid up share capital keeping other factors constant for the sensitivity analysis.
About the FCCB issue: Tata Motors had raised funds to the tune of US$ 400 m (Rs 17.5 bn) in April 2004. The primary purpose of the borrowing was to fund the Rs 60 bn capex plans of the company spread over next five years. This FCCB issue was amongst the largest borrowings by any Indian corporate house in a single deal.
The financial impact...
| Operating profit
| Other income
| Less: Depreciation
| Extraordinary item
| Tax @ 25%
| Net Profit
| Share capital
*In FY05, the debt of the company has almost doubled to Rs 24.9 bn as compared to FY04. The interest, net profit and share capital figures are based on the assumption that the company would have borrowed from the domestic market at average interest rates, which is better than FY04 average interest rates by about 200 basis points
**The interest, net profit figures are the reported numbers for FY05. Share capital figure is derived based on assumed conversion of the entire US$ 400 m into share capital.
As can be seen from above table, the management (in this case) was prudent to keep the interest of the existing equity shareholders in mind while determining the terms of conversion, as there is no dilution in the EPS and Cash flow per share (CFS) figure, assuming other things being constant. Going forward, as the conversion of FCCB takes place, the interest liability of the company will reduce further. To that extent, there is a potential upside in the EPS number.
However, this may not be the case in every FCCB issue, and hence the investor should keep in mind that though an FCCB issue can be beneficial for the financial health of the company, it may not necessarily add to the EPS. Further, with FCCB, the company is exposed to vulnerable global economic situation like rising interest rates or currency fluctuations, which can adversely impact the earnings of the company.
More Views on News
Aug 14, 2017
Tata Motors Ltd disappoints again for both India and JLR business. Management commentary indicates a slow year ahead.
Aug 2, 2017
GST realted cost impacts Margins, Management expects good year ahead.
Aug 1, 2017
Good Recovery in the Scooters market, expects pick up in exports too.
Aug 1, 2017
New Export Markets picking up, Management expects good recovery in domestic Three wheeler market.
Jul 6, 2017
Ends the year on a Flat note. Expects good recovery in the exports market.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407