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So FCCBs do hurt, or do they?

A follow up from my post “The Falling Rupee and the FCCB problem” (Sep 11, 2008). ET confirms that this is indeed showing up in results.

Delhi-based drug major Jubilant Organosys has recorded a hit of Rs 174 crore for the second quarter as a notional loss on its outstanding FCCB and other foreign loans. The rupee value of these loans has gone up as the dollar has appreciated sharply against the Indian currency. Other drug companies such as Biocon and Alembic have also recorded losses on the same account.

The malaise is not restricted to any one sector. Auto ancillary manufacturer Balkrishna Industries and IT firm Rolta have also seen losses on the front. While the latter took a hit of Rs 61 crore on the forex account, the former has taken a charge of Rs 31 crore.

FCCBs were a preferred route for raising money some years back. Foreign investors would typically put money into the company at a very low interest rate, which could be converted to equity over a certain period. Usually, the conversion price would be 30-40% higher than the then market price. If not converted, the money would be treated as a loan.

Not only are there temporary mark-to-market losses, some of these companies have to contend with loans they weren’t quite willing to repay (they assumed conversion). JP Associates, for instance, has fallen even more since that post – and their conversion price is Rs. 247. Current price? Around Rs. 80.

But they announced results today – EPS of Rs. 1.57 versus some 0.86 last year, a phenomenal growth. I don’t see the impact of the forex losses mentioned – as I can imagine, many companies will not take it up when it’s losses (choosing to only take it up when it’s gains). I hope that is not the case with JP.

(This is not just the conversion of course – lots of other factors, overall sentiment etc. But the conversion price is now looking even more difficult to achieve, plus they now have a 1800 cr. rights issue coming up. This is one helluva tough cookie – but guess what, management bought 1 cr. shares at Rs. 397 each, so they must be really confident. )