In 2009, HDFC borrowed about 4,000 cr. in two and three year NCDs, of which they will pay back 2,000 cr. in August 2011. This will need to be rolled over, since the money was used to buy HDFC Bank shares at Rs. 1,520 each. (About 2.36 cr. shares)
The investment was a good one – shares of HDFC Bank are at Rs. 2,400 today. But HDFC isn’t about to dilute it’s stake, so the market value is irrelevant; the issue is about how much they pay to service the debt taken to own this stake.
Already, they’ve paid more than 600 cr. (interest on the whole amount for two years). They’ve received about Rs. 28.5 per share in dividends, which is around Rs. 67 cr., in the last two years. (For the shares bought only with this borrowing) Net-net, they paid out Rs. 550 cr. .
Of course, they gained, over Rs. 2,000 cr. from the share price increase, so in that context it continues to be a good deal; but the break-even point for those shares has gone up from the initial 1,520 to about 1,800 today.
They’ll have to roll this 2,000 cr. over, and the interest rates are likely to be 9-10% this time around. That implies a payout of around 180 cr. on this tranche per year and by 2012, when the next tranche comes due, the total interest paid by HDFC for the purchase will be Rs. 1,000 cr. (or about Rs. 425 per share).
The other thing HDFC had sold then was options at Rs. 275 (300 cr. worth), which allowed investors to buy in at Rs. 3,000 a share. The share’s gone through a 1:5 split, so the breakeven price was Rs. 655 for the investors – HDFC trades at Rs. 675 today, though it was lower than that price a few days back. To convert such options, the buyers have to put up Rs. 600 per share (they’ve already paid the premium) and HDFC will issue them shares. That gives them the money to pay for the HDFC bank shares without needing to borrow much. Will these options get converted?
Currently the answer has got to be "yes", even if the price dips below 655, because the loss to investors for non-conversion would end up being Rs. 55 per share. Any price above 600 almost surely means conversion. But there is some risk – dilution reduces the price of shares, for one, although at 3.5% dilution that impact is low. And if investors want to realize the profit, they must pay HDFC the money and sell the shares immediately, since nearly 3000 cr. worth is the purchase value. Such selling pressure can’t really be sustained (HDFC traded 222 cr. in the whole day today).
(To those confused, there are two entities: HDFC and HDFC Bank. The former owns about 22% of the latter)
As August nears, the action will unfold. Holler if you hear something interesting.