FCCB Beyond Redemption Edelweiss

November 25, 2008

ANALYSIS BEYOND CONSENSUS ... the new ABC of research

FCCB: Beyond redemption

Negatives of FCCBs coming to the fore

Over the past few years, Indian corporates have aggressively used foreign currency convertible bonds (FCCBs) to raise seemingly cheap funds to finance their growth plans. FCCBs, with their low coupon rates and high conversion prices (relative to prevailing stock prices), were extremely attractive particularly in what seemed a secular bull market. These instruments, however, are double-edged swords with large redemption premiums embedded and bear currency risk. The steep correction in stock prices in CY08 YTD has brought many negatives of FCCBs to the fore. Many FCCBs are currently quoting at very high yields in the secondary market, reflecting prevailing risk perception (refer table 5 for details).

USD 12.5 bn of FCCBs likely to come up for redemption

As of September 30, 2008, 74 companies in the BSE 5001 had FCCB outstanding aggregating USD 10.9 bn. We estimate that for 61 companies the probability of FCCBs being converted into equity is low, given the gap between current stock prices and effective conversion price. We have assumed a 30% CAGR to the current market price as a filter to identify companies where conversion is unlikely. These 61 companies have FCCB outstanding of USD 9.4 bn; USD 12.5 bn including redemption premium (see table below).

(USD mn)

Calendar year FCCB outstanding Redemption amount FCCB outstanding Redemption amount

2009 152 194 152 194

2010 783 960 527 668

2011 3,452 4,278 2,761 3,549

2012 6,144 8,288 5,497 7,500

2013 447 604 440 595

Total 10,978 14,325 9,376 12,507

Aggregated for 74 companies Aggregated for 61 shortlisted companies

Source: Company annual reports, Capitalline, Edelweiss research

Overstated profits and refinancing risk

For companies, where FCCBs are likely to be redeemed, profits are overstated to the extent the true cost of the ‘debt’ or YTM is not reflected in the P&L. The YTM or effective interest cost is lower than that for comparable debt due to the embedded call option. Companies will also face refinancing risk, which is significant in the prevailing tight credit environment. For these 61 shortlisted companies, we have calculated the following: 1. The impact of amortising redemption premium on YTM basis, which has been kept off P&L by most companies: On

an aggregate basis, the last reported PBT of these companies would have been lower 4.5% if redemption premium had been amortised through the P&L.

2. Estimated forex losses that will further widen the gap between the current market price and effective conversion price: Most companies have provided for MTM losses through the P&L. On an aggregate basis, estimated MTM losses on FCCBs provided by the 61 companies were 12.5% of last reported PBT.

3. The impact of refinancing on the last reported PBT, assuming refinancing @ 12% p.a.: On an aggregate basis, the reported PBT of the shortlisted universe would be lower 11.7%.

Considering FCCBs as debt instead of equity for these 61 companies results in aggregate debt/equity ratio increasing from 0.9x to 1.4x.

Note: For company specific analysis, we have relied on the latest available annual reports of respective companies and disclosures therein.

1 18 companies for which details were not available have been excluded (Refer annexure 1 for the list of excluded companies)

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

1

Manoj Bahety, CFA +91-22-6623 3362 ([email protected])

Analysis Beyond Consensus

Edelweiss Securities Limited

2

FCCB: A convenient tool to keep significant financing cost off P&L

FCCBs have facilitated financing the rapid organic and inorganic growth of India Inc. by providing funds at artificially low costs. FCCBs are typically structured to raise funds at low coupon rates, varying from 0-2%, primarily because of embedded call option on the equity shares of the issuing company and redemption premium payable on maturity. At the option of the holder, bonds are convertible into equity shares at a pre-defined conversion price, applying a predefined exchange rate. If not converted, the bonds are redeemable at a lump sum premium. Currently, most companies do not charge redemption premium to the P&L account on the assumption that bonds will finally be converted into equity shares. Hence, in the event of non conversion, a significant cost is kept off the P&L and profits are overstated to that extent (refer our earlier report FCCB Real debt; optional equity, dated May 5, 2008, for different accounting practices currently being followed by companies and impact of logical accounting treatment on reported profits thereof). We have calculated the impact of amortisation of redemption premium on YTM basis on the reported PBT of 61 companies, where the possibility of conversion looks remote (refer table 2 for details). Reported profits during FY08 were also higher because of unrealised forex gains on FCCB revaluation due to steep INR appreciation. From a taxation perspective, deduction in respect of redemption premium, even if provided for, is not allowed yearly. However, full deduction will be available in the year of redemption, assuming sufficient taxable profits are available to absorb one time redemption premium cost.

Recent market correction reduces probability of conversion

With the recent financial turmoil, stock prices have undergone substantial correction, diminishing the probability of conversion of most FCCBs. We analysed FCCBs issued by BSE 5001 companies and found that current market prices have to increase in the 2617-5% range for the conversion to be viable (refer table 1 for details). We found 61 companies wherein the price has to rise by at least 30% CAGR for conversion to be viable, also steep INR depreciation against USD and other currencies will further widen the gap between the current market price and effective conversion price by ~ 20%.

FCCB redemption likely to increase leverage and interest cost

Redemption call on FCCBs will be required to be financed by a mix of surplus cash, internal accruals, and raising fresh debts. Refinancing FCCB with fresh borrowings will significantly increase leverage and interest expenses, adversely impacting profitability. We have analysed the probable impact on current profits of companies where conversion looks remote, assuming that the bonds will be refinanced @ 12% (refer table 3 for details).

INR depreciation adds fuel to the fire

Very few companies have hedged foreign currency exposure on FCCBs, while others, assuming conversion, kept the forex risk on FCCB unhedged. With depreciation of INR against USD and other global currencies, the redemption amount will increase, as companies need to repay the loan in the issuing currency. We have analysed the sensitivity of foreign currency fluctuation on companies with unhedged FCCB exposure (refer table 4 for details).

Steep discount sale on FCCBs a buy-back opportunity for India Inc.

On account of the recent credit crunch, FCCBs issued by Indian corporates are currently trading at very high yields, reflecting the prevailing risk perception (refer table 5 for indicative prices and yields). There can be significant benefits to the company concerned as well as to the economy if corporates buy back their FCCBs at prevailing discounted rates. In view of these potential benefits, the Reserve Bank of India (RBI) has announced in its recent credit policy that it will consider proposals from Indian companies to prematurely buy back their FCCBs. The buy back should be financed by the company's foreign currency resources held in India or abroad and/or out of fresh external commercial borrowings (ECBs) raised in conformity with current norms. Proposals in this regard are to be considered under the approval route.

FCCB


3

Table 1: List of BSE 5001 companies having outstanding FCCBs as on September 30, 2008

Sr. No. Name of company

Maturity period

Issuing currency

Issue size

(mn)

FCCB outstanding

(mn)

Effective conversion price

(INR) (A)

CMP as on Nov. 20, 2008

(INR) (B)% Diff.

(A-B)/B

1.1 3i Infotech** Mar-11 USD 50 20 159.8 34.4 365.3

1.2 3i Infotech** 2012 USD 100 100 233.3 34.4 579.1

1.3 3i Infotech** Apr-12 EUR 30 30 215.4 34.4 527.1

2 Aban Offshore Apr-11 JPY 11,610 5,410 3,397.4 746.4 355.2

3 Adani Enterprises*@ Dec-11 USD 250 248 NA 327.6 NA

4 Adlabs Film Jan-11 EUR 84 21 661.2 147.0 350.0

5 Alok Industries @ Jun-10 USD 55 24 71.6 14.9 382.1 6.1 Amtek Auto2 Jun-11 USD 250 250 613.7 44.1 1,291.6 6.2 Amtek Auto2 Jun-10 USD 150 17 271.6 44.1 515.9

7 Amtek India@ 2 Oct-10 USD 100 44 120.1 21.9 449.7 8 Ashok Leyland * Apr-09 USD 100 1 30.0 13.9 116.6

9.1 Aurobindo Pharma May-11 USD 150 150 1,483.4 117.6 1,161.9

9.2 Aurobindo Pharma May-11 USD 50 50 1,292.2 117.6 999.3

9.3 Aurobindo Pharma Aug-10 USD 60 56 730.6 117.6 521.5 10 Bajaj Hindusthan@ 3 Feb-11 USD 120 120 465.4 43.0 983.6

11.1 Bartronics India Jun-12 USD 25 6 198.7 62.2 219.6

11.2 Bartronics India Jan-13 USD 50 50 400.1 62.2 543.7

12.1 Bharat Forge* Apr-10 USD 60 44 426.1 90.2 372.7



12.4 Bharat Forge* Apr-13 USD 40 40 1,080.2 90.2 1,098.2

13 Bharti Airtel Apr-09 USD 115 0 260.8 592.2 (56.0)14 Core Project & Techno.*@ May-12 USD 80 25 165.7 44.2 274.9

15 Cranes Software Mar-11 EUR 42 42 129.8 85.9 51.1

16 Dishman Pharma* Aug-10 USD 50 3 222.6 145.8 52.7

17 Educomp Solutions Jul-12 USD 80 79 4,161.8 1,752.2 137.5

18 Electrosteel Cast* May-11 USD 75 20 57.0 15.4 271.6

19 Everest Kanto Cylinders Oct-12 USD 35 35 433.2 150.4 188.0

20 Financial Technologies Dec-11 USD 100 100 3,476.4 600.8 478.7

21 First Source Solutions Dec-12 USD 275 275 128.6 11.8 990.1

22 Gati5 Dec-11 USD 20 15 166.4 37.0 350.2

23 Geodesic Information Jan-13 USD 125 125 418.3 73.7 467.9

24.1 Glenmark Pharma*** Feb-10 USD 50 5 339.3 306.8 10.6

24.2 Glenmark Pharma*** Feb-10 USD 20 1 288.3 306.8 (6.0)

24.3 Glenmark Pharma* Jan-11 USD 30 30 814.1 306.8 165.3

25 Graphite India* Oct-10 USD 40 35 67.3 34.1 97.5

26 Great Offshore Oct-12 USD 42 42 1,241.6 264.4 369.6

27 GTL Infrastructure Nov-12 USD 300 265 74.5 36.4 104.6

28.1 Guj. NRE Coke** Apr-11 USD 60 23 87.1 22.3 291.5

28.2 Guj. NRE Coke** Mar-10 USD 55 0 61.1 22.3 174.7

29 HDFC Sep-10 USD 500 117 1,753.6 1,289.8 36.0

30.1 Hotel Leela Ventures Apr-12 USD 100 100 105.6 20.5 416.2

30.2 Hotel Leela Ventures* Sep-10 EUR 60 51 59.4 20.5 190.3

31 India Cements May-11 USD 75 75 451.3 85.5 428.2

32.1 ISMT@ Nov-11 USD 10 10 92.0 21.7 324.9

32.2 ISMT@ Nov-11 USD 10 10 122.3 21.7 464.8

33 IVRCL Infrastructure Nov-10 USD 65 8 332.1 117.5 182.7

34 Jain Irrigation Mar-11 USD 60 11 481.6 298.6 61.3

35.1 Jaiprakash Associates* Mar-13 EUR 165 5 147.6 59.6 147.9

35.2 Jaiprakash Associates* Feb-10 USD 100 2 62.4 59.6 4.7



4


Maturity period

Issuing currency

Issue size

(mn)

FCCB outstanding

(mn)


(INR) (A)


(INR) (B)% Diff.

(A-B)/B

35.3 Jaiprakash Associates* Sep-12 USD 400 396 365.9 59.6 514.536 Jindal Saw4 Jun-11 JPY 9,090 6,790 796.0 274.3 190.2

37 Jindal Stainless Dec-09 USD 60 24 155.8 32.1 385.2

38 JSW Steel Jun-12 USD 325 324 1,361.5 221.4 515.1

39.1 Jubilant Organosys* May-09 USD 35 0 186.1 156.3 19.1

39.2 Jubilant Organosys* May-10 USD 75 53 377.9 156.3 141.8

39.3 Jubilant Organosys May-11 USD 200 200 588.9 156.3 276.9

40.1 Karuturi Global *** Feb-12 USD 25 3 17.8 8.1 120.8

40.2 Karuturi Global *** Oct-12 USD 50 45 40.7 8.1 403.4

41 KEI Industries Nov-11 USD 36 33 117.9 15.5 663.0

42 KLG Systel Mar-12 USD 22 16 575.1 79.3 625.2

43 Lupin** Jan-11 USD 100 72 764.0 536.6 42.4

44 Mahindra & Mahindra Apr-11 USD 200 200 1,180.5 301.6 291.5

45 Man Industries* May-12 USD 50 50 210.3 31.3 572.0

46 Mascon Global@ Dec-12 USD 50 50 NA 5.7 NA

47 Mercator Lines**@ Apr-10 USD 60 7 59.8 24.3 146.6

48.1 Moser Baer** Jun-12 USD 75 75 491.6 52.5 837.3

48.2 Moser Baer** Jun-12 USD 75 75 568.2 52.5 983.3

49.1 Orchid Chemicals Feb-12 USD 175 175 497.3 79.3 527.5

49.2 Orchid Chemicals Nov-10 USD 43 20 358.8 79.3 352.7

50 Panacea Biotec Feb-11 USD 50 37 510.6 127.9 299.4

51 Pidilite Industries Dec-12 USD 40 40 356.8 89.3 299.6

52 Prithvi Information Feb-12 USD 50 50 522.8 37.9 1,281.2

53 PSL Sep-10 USD 40 3 270.0 85.7 215.3

54 Punj Lloyd* Apr-11 USD 125 50 343.1 143.4 139.2

55 Rajesh Exports*** Feb-12 USD 150 150 142.0 21.9 550.1

56 Ranbaxy Laboratories4 Mar-11 USD 440 440 684.5 218.1 213.9

57.1 Reliance Communications Feb-12 USD 1,000 990 859.6 182.3 371.7

57.2 Reliance Communications May-11 USD 500 297 624.9 182.3 242.9

58 Resources@ Oct-11 USD 300 300 NA 40.9 NA

59 Rolta India** 5 Jun-12 USD 150 150 513.9 167.8 206.4

60 S Kumar Nationwide@ Apr-11 USD 50 9 57.0 22.3 156.2

61 Sintex Industries 2013 USD 225 225 749.8 166.0 351.7

62.1 Sterling Biotech@4 2010 USD 175 114 152.8 173.4 (11.9)

62.2 Sterling Biotech@4 2012 USD 250 250 204.6 173.4 18.0

63.1 Strides Arcolab 4 Jun-12 USD 100 100 669.5 100.3 567.8

63.2 Strides Arcolab4 Apr-10 USD 40 40 490.6 100.3 389.4

64 Subex Mar-12 USD 180 180 892.4 32.9 2,616.7

65.1 Suzlon Energy * Oct-12 USD 200 200 538.3 46.0 1,070.2

65.2 Suzlon Energy * Jun-12 USD 300 300 522.4 46.0 1,035.6

66 Tata Chemicals Jan-10 USD 150 44 279.0 144.0 93.7

FCCB


5


Maturity period

Issuing currency

Issue size

(mn)

FCCB outstanding

(mn)


(INR) (A)


(INR) (B)% Diff.

(A-B)/B

67.1 Tata Motors Apr-09 USD 100 2 573.1 126.5 353.2

67.2 Tata Motors Apr-11 USD 300 300 950.4 126.5 651.6

67.3 Tata Motors Mar-11 JPY 11,760 11,760 1,001.4 126.5 691.9

67.4 Tata Motors Jun-12 USD 490 490 1,266.7 126.5 901.8

68 Tata Power Feb-10 USD 200 15 683.8 633.9 7.9

69 Tata Steel Sep-12 USD 875 875 935.0 158.1 491.6

70 Tata Teleservices (Mah.) Jul-09 USD 125 11 29.2 19.7 48.4

71 Tulip Telecom Aug-12 USD 150 150 1,643.4 509.9 222.3

72.1 United Phosphorus@ 2009 USD 50 1 145.8 94.2 54.8

72.2 United Phosphorus@ Jan-11 USD 80 67 272.1 94.2 189.073 Wockhardt4 Oct-09 USD 110 109 629.8 92.9 578.0

74 Zee Entertainment Apr-09 USD 100 4 178.4 109.4 63.1 Source: Company annual reports, Capitalline, RBI, Edelweiss research

Notes:

@ Conversion price is used instead of effective conversion price, as redemption premium was NA

* Price adjusted for stock split

** Price adjusted for bonus issue

*** Price adjusted for bonus issue and stock split

Effective conversion price = Conversion price + redemption premium 2 year ended June, 2007

3 year ended September, 2007 4 year ended Dec, 2007

5 year ended June, 2008

We understand that in certain cases effective conversion price may be different from what is shown above, based on scenarios that may

occur and are mentioned in the relevant FCCB prospectus. However, for the purpose of this analysis, we have restricted ourselves to the

disclosures made in company’s latest annual report.



6

Table 2: Impact of amortisation of redemption premium through P&L on YTM basis Sr. No. Name of company PBT (INR mn)^^ % impact on PBT

1 3i Infotech 1,983 (23.6)

2 Aban Offshore 1,807 (4.8)

3 Adlabs Film 441 (11.8)

4 Alok Industries@ 2,865 NA

5 Amtek Auto2 5,758 (11.3)

6 Amtek India@2 1,778 NA

7 Ashok Leyland 6,382 0.0

8 Aurobindo Pharma 2,917 (27.0)

9 Bajaj Hindusthan@3 (295) NA

10 Bartronics India 584 (25.7)

11 Bharat Forge 4,499 (9.2)

12 Core Project & Technologies@ 979 NA

13 Electrosteel Cast 514 (9.7)

14 Everest Kanto Cylinders 1,320 (7.8)

15 Financial Technologies 11,549 (2.8)

16 First Source Solutions 1,432 (52.7)

17 Gati5 279 (18.7)

18 Geodesic Information 1,643 0.0

19 Glenmark Pharma 7,115 (1.2)

20 Graphite India 2,231 (2.5)

21 Great Offshore 2,190 (5.6)

22 Guj. NRE Coke 1,871 (3.3)

23 Hotel Leela Ventures 2,233 (20.9)

24 India Cements 8,489 (2.9)

25 ISMT@ 1,286 NA

26 IVRCL Infrastructure 4,865 (0.5)

27 Jaiprakash Associates 10,931 (11.7)

28 Jindal Saw4 16,135 (0.5)

29 Jindal Stainless 3,985 0.0

30 JSW Steel 24,243 (3.9)

31 Jubilant Organosys 4,561 (15.9)

32 Karuturi Global 1,042 (12.1)

33 KEI Industries 648 (15.4)

34 KLG Systel 750 (6.3)

35 Mahindra & Mahindra 25,040 (1.6)

36 Man Industries 1,107 (14.3)

37 Mercator Lines@ 4,094 NA

38 Moser Baer (1,955) (20.0)

39 Orchid Chemicals 2,286 (25.4)

40 Panacea Biotec 1,877 (5.8)

41 Pidilite Industries 2,077 0.0

42 Punj Llyod 4,835 (1.9)

43 Prithvi Information 813 (21.1)

44 PSL 1,253 (0.6)

45 Rajesh Exports 2,321 (21.1)

46 Ranbaxy Laboratories4 9,985 (8.4)

47 Reliance Communications 70,763 (3.9)

48 Rolta India5 2,685 (15.3)

49 S Kumar Nationwide@ 2,621 NA

50 Sintex Industries 3,019 (15.7)

51 Strides Arcolab4 (346) (117.3)

52 Subex (617) (71.4)

FCCB


7

Sr. No. Name of company PBT (INR mn)^^ % impact on PBT

53 Suzlon Energy 13,676 (11.3)

54 Tata Chemicals 11,759 (0.6)

55 Tata Motors 30,863 (4.7)

56 Tata Steel 163,711 (0.9)

57 Tata Teleservices (Maharashtra) (1,248) (1.3)

58 Tulip Telecom 2,010 (22.8)

59 United Phosphorus@ 3,013 NA

60 Wockhardt4 4,741 (4.8)

61 Zee Entertainment 5,787 (0.1) Source: Company annual reports, Capitalline, Edelweiss research

Notes: @ Redemption premium for these companies is not available

^^ Figures mentioned pertains to FY08 except specified otherwise

Calculated on YTM basis on reported PBT of FY08

BSE 5001 companies where CMP has to increase at CAGR of 30% to reach the effective conversion price 2 year ended June, 2007





8

Table 3: Estimated refinancing impact on profitability of companies


FCCB outstanding^

(INR mn) % impact

on PBT

Total cash and cash

equivalents## (INR mn)

FCCB / Capital

employed (%)

Debt/Equity as on March 31, 2008 ^^

(x)

1 3i Infotech 10,756 (65.1) 2,665 33.3 1.7

2 Aban Offshore 2,912 (19.3) 8,710 1.6 16.1

3 Adlabs Film 1,703 (46.4) 2,660 8.1 1.3

4 Alok Industries@ 1,115 (4.3) 17,255 1.3 4.1

5 Amtek Auto2 16,766 (34.9) 4,867 29.0 0.8

6 Amtek India@2 2,056 (13.3) 2,718 13.7 0.7

7 Ashok Leyland 47 (0.1) 9,324 0.1 0.4

8 Aurobindo Pharma 17,396 (71.6) 2,827 34.4 1.6

9 Bajaj Hindusthan@3 5,609 (228.5) 2,674 9.5 2.6

10 Bartronics India 3,637 (74.7) 165 43.3 1.1

11 Bharat Forge 11,856 (31.1) 6,166 22.2 1.0

12 Core Project & Technologies@ 1,183 (14.5) 538 22.9 0.4

13 Electrosteel Cast 1,290 (30.1) 2,608 4.1 0.7

14 Everest Kanto Cylinders 2,346 (21.3) 745 19.5 0.5

15 Financial Technologies 6,907 (7.2) 5,544 20.8 0.3

16 First Source Solutions 17,991 (150.8) 1,246 40.1 2.7

17 Gati5 1,041 (44.7) 166 12.1 0.8

18 Geodesic Information 8,120 (26.1) 6,562 51.6 1.1

19 Glenmark Pharma 1,968 (3.3) 1,565 6.9 0.7

20 Graphite India 1,992 (10.0) 1,720 10.1 0.8

21 Great Offshore 2,798 (15.3) 3,376 9.2 1.1

22 Guj. NRE Coke 1,481 (9.5) 2,401 4.4 0.8

23 Hotel Leela Ventures 11,255 (58.9) 2,959 24.4 2.2

24 India Cements 5,200 (7.4) 4,293 6.0 0.6

25 ISMT@ 939 (8.8) 437 5.3 1.9

26 IVRCL Infrastructure 506 (1.2) 6,609 0.7 0.7

27 Jaiprakash Associates 27,420 (30.1) 24,648 10.0 2.3

28 Jindal Saw4 3,538 (2.5) 7,931 8.2 0.5

29 Jindal Stainless 1,467 (2.3) 7,801 1.5 2.5

30 JSW Steel 21,731 (10.8) 6,872 6.5 1.5

31 Jubilant Organosys 16,808 (44.2) 5,645 31.0 1.7

32 Karuturi Global 2,963 (34.1) 301 24.4 0.7

33 KEI Industries 2,231 (38.9) 326 23.8 1.7

34 KLG Systel 1,080 (16.3) 171 25.3 0.6

35 Mahindra & Mahindra 12,019 (5.8) 27,516 5.0 1.6

36 Man Industries 3,440 (37.3) 1,470 29.8 0.9

37 Mercator Lines@ 329 (0.8) 8,561 0.9 1.2

38 Moser Baer 9,662 (59.3) 10,060 11.1 1.4

39 Orchid Chemicals 13,089 (68.7) 310 29.5 3.0

40 Panacea Biotec 2,467 (15.8) 1,655 13.4 0.6

41 Pidilite Industries 2,617 (6.5) 1,720 14.0 0.8

42 Punj Llyod 2,936 (7.3) 6,898 4.6 0.6

43 Prithvi Information 3,543 (52.3) 2,313 26.0 0.9

44 PSL 169 (1.6) 4,023 0.7 1.7

45 Rajesh Exports 10,436 (54.0) 51,324 34.1 1.2

46 Ranbaxy Laboratories4 26,182 (31.5) 4,383 25.0 1.5

47 Reliance Communications 78,532 (13.3) 109,495 9.4 0.9

48 Rolta India59,815 (43.9) 5,415 34.3 0.6

FCCB


9


FCCB outstanding^

(INR mn) % impact

on PBT

Total cash and cash

equivalents## (INR mn)

FCCB / Capital

employed (%)

Debt/Equity as on March 31, 2008 ^^

(x)

49 S Kumar Nationwide@ 422 (1.6) 112 1.5 1.4

50 Sintex Industries 13,654 (54.3) 16,934 26.0 1.3

51 Strides Arcolab4 9,377 (322.8) 1,918 35.5 4.6

52 Subex 11,491 (196.1) 231 42.9 1.2

53 Suzlon Energy 34,053 (29.9) 69,602 11.1 1.2

54 Tata Chemicals 2,492 (2.5) 7,007 2.3 1.3

55 Tata Motors 52,778 (20.1) 47,999 18.0 1.3

56 Tata Steel 50,659 (3.5) 53,553 4.0 1.6

57 Tata Teleservices (Maharashtra) 630 (5.6) 345 2.2 (13.1)

58 Tulip Telecom 10,175 (60.7) 5,938 44.8 2.0

59 United Phosphorus@ 3,187 (12.7) 8,446 7.2 0.7

60 Wockhardt4 6,599 (16.7) 3,802 10.2 2.3

61 Zee Entertainment 207 (0.4) 1,946 0.7 0.1 Source: Company annual reports, Capitalline, Edelweiss research

Note: @ Conversion price is used instead of effective conversion price, as redemption premium was NA

^^ Figures mentioned pertains to 31/03/08 unless specified with the name of the company

BSE 5001 companies where CMP has to increase at CAGR of 30% to reach the effective conversion price

Impact on PBT has been calculated on last years reported PBT assuming refinancing @ 12%

^Including redemption premium

##Includes liquid investments 2 year ended June, 2007



Capital employed= Networth+Total Debt



10

Table 4: Estimated impact of foreign exchange fluctuation on profitability

Table 4A: Companies where FCCBs are unhedged:


Issuing currency

FCCB outstanding

(in mn)

% impact on PBT of change in

exchange rate#


exchange rate by 10%

1 3i Infotech USD 120 (42.2) 28.5

2 3i Infotech EUR 30 (7.1) 10.3

3 Aban Offshore JPY 5,410 (21.0) 14.1

4 Adani Enterprises USD 248 (39.9) 26.9

5 Adlabs Film EUR 21 (22.0) 31.8

6 Alok Industries USD 24 (5.8) 3.9

7 Aurobindo Pharma USD 256 (61.2) 41.2

8 Bajaj Hindusthan3 USD 120 (292.0) 190.4

9 Educomp Solutions USD 79 (28.5) 19.2

10 Electrosteel Cast USD 20 (27.7) 18.7

11 Everest Kanto Cylinders USD 35 (18.5) 12.4

12 GTL Infrastructure USD 265 (926.1) 623.7

13 Guj. NRE Coke USD 23 (8.4) 5.7

14 ISMT USD 20 (10.8) 7.3

15 IVRCL Infrastructure USD 8 (1.1) 0.7

16 Jaiprakash Associates EUR 5 (0.2) 0.3

17 Jaiprakash Associates USD 398 (25.4) 17.1

18 Jindal Stainless USD 24 (4.2) 2.8

19 Jubilant Organosys USD 253 (38.7) 26.0

20 Mahindra & Mahindra USD 200 (5.6) 3.7

21 Orchid Chemicals USD 195 (59.4) 40.0

22 Panacea Biotec USD 37 (13.7) 9.2

23 PSL USD 3 (1.4) 0.924 Ranbaxy Laboratories4 USD 440 (33.2) 20.7

25 Rolta India5 USD 150 (22.3) 26.2

26 S Kumar Nationwide USD 9 (2.4) 1.6

27 Subex USD 180 (203.3) 136.9

28 Suzlon Energy USD 500 (25.5) 17.2

29 Tata Steel USD 875 (3.7) 2.5

30 Tata Teleservices (Maharashtra) USD 11 (6.3) 4.2

31 Tulip Telecom USD 150 (13.9) 9.3

32 Wockhardt4 USD 109 (17.2) 10.7 Source: Company annual reports, Capitalline, Edelweiss research

Note: Impact of INR depreciation has been calculated as a percentage of the reported PBT of last FY

#From latest balance sheet date to Sept 30, 2008 2 year ended June, 2007

3 year ended September, 2007

4 year ended Dec, 2007 5 year ended June, 2008

Unhedged position is taken as per the latest annual report. Company may have entered into appropriate hedging contract

during the year, which has not been considered in the above calculation

FCCB


11

Table 4B: Companies where unhedged/hedged position of FCCB has not been expressly disclosed


Issuing currency

FCCB outstanding

(in mn)


exchange rate#


exchange rate by 10%

1 Amtek Auto2 USD 267 (28.8) 21.8

2 Amtek India2 USD 44 (15.3) 11.6

3 Ashok Leyland USD 1 (0.1) 0.1

4 Bartronics India USD 56 (66.8) 45.0

5 Bharat Forge USD 183 (28.4) 19.1

6 Bharti Airtel USD 0 (0.0) 0.0

7 Core Project & Technologies USD 25 (17.9) 12.1

8 Cranes Software EUR 42 (14.7) 21.2

9 Dishman Pharma USD 3 (1.4) 1.0

10 Financial Technologies USD 100 (6.0) 4.1

11 First Source Solutions USD 275 (133.9) 90.2

12 Gati5 USD 15 (21.4) 25.2

13 Glenmark Pharma USD 36 (3.5) 2.4

14 Graphite India USD 35 (10.9) 7.3

15 Great Offshore USD 42 (13.4) 9.0

16 HDFC USD 117 (2.4) 1.6

17 Hotel Leela Ventures USD 100 (31.2) 21.0

18 Hotel Leela Ventures EUR 51 (10.8) 15.6

19 India Cements USD 75 (6.2) 4.1

20 Jain Irrigation USD 11 (4.0) 2.7

21 Jindal Saw4 JPY 6,790 (3.8) 1.9

22 KLG Systel USD 16 (14.9) 10.0

23 Lupin USD 72 (9.3) 6.3

24 Man Industries USD 50 (31.5) 21.2

25 Mascon Global USD 50 (49.7) 33.5

26 Mercator Lines USD 7 (1.2) 0.8

27 Moser Baer USD 150 53.5 36.0

28 Pidilite Industries USD 40 (13.4) 9.0

29 Prithvi Information USD 50 (42.9) 28.9

30 Punj Lloyd USD 50 (7.2) 4.8

31 Rajesh Exports USD 150 (45.0) 30.3

32 Reliance Communication USD 1,287 (12.7) 8.5

33 Reliance Natural Resources USD 300 (243.9) 164.3

34 Sintex Industries USD 225 (51.9) 35.0

35 Sterling Biotech4 USD 364 (97.7) 60.9

36 Strides Arcolab4 USD 140 (305.0) 190.1

37 Tata Motors USD 792 (17.9) 12.1

38 Tata Motors JPY 11,760 (1.6) 1.7

39 Tata Power USD 15 (0.7) 0.4

40 United Phosphorus USD 68 (15.7) 10.6

41 Zee Entertainment USD 4 (0.5) 0.3 Source: Company annual reports, Capitalline, Edelweiss research

Note: The likely impact due to forex fluctuation assuming that FCCBs were not hedged

Impact of INR depreciation has been calculated as a percentage of the reported PBT of last FY

#From latest balance sheet date to Sept 30, 2008 2 year ended June, 2007





12

Table 5: Indicative FCCB yields

Sr.No. Company name Last quote Currency Price Yield% Maturity month

1 3i Infotech 13-Nov-08 USD 50.5 32.2 July, 2012

2 Aban Offshore 18-Nov-08 JPY 69.1 26.6 April, 2011

3 Adani Enterprises 11-Nov-08 USD 73.3 17.2 Dec 2011

4 Adlabs Film 12-Nov-08 USD 77.3 23.0 Dec 2011

5 Alok Industries NA NA NA NA NA

6 Amtek Auto 18-Nov-08 USD 70.1 27.0 June, 2011

7 Amtek India 18-Nov-08 USD 93.8 20.2 Oct, 2010

8 Ashok Leyland 6-Nov-08 USD 87.3 31.9 April, 2009

9 Aurobindo Pharma 18-Nov-08 USD 57.5 45.5 May, 2011

10 Bajaj Hindusthan 18-Nov-08 USD 80.6 24.4 Feb, 2011

11 Bartronics India NA NA NA NA NA

12 Bharat Forge 18-Nov-08 NA 106.1 15.3 April, 2010

13 Bharti Airtel NA NA NA NA NA

14 Core Project & Technologies 17-Nov-08 USD 76.6 20.5 May, 2012

15 Cranes Software NA NA NA NA NA

16 Dishman Pharma NA NA NA NA NA

17 Educomp Solutions 18-Nov-08 USD 88.0 13.7 July, 2012

18 Electrosteel Cast 18-Nov-08 USD 70.5 27.4 May, 2011

19 Everest Kanto Cylinders 6-Nov-08 USD 71.8 19.2 Oct, 2012

20 Financial Technologies 15-Oct-08 USD 96.9 13.6 Dec., 2011

21 First Source Solutions 11-Nov-08 USD 52.0 27.5 Dec, 2012

22 Gati NA NA NA NA NA

23 Geodesic Information NA NA NA NA NA

24 Glenmark Pharma NA NA NA NA NA

25 Graphite India 11-Nov-08 USD 99.6 12.1 Oct, 2010

26 Great Offshore NA NA NA NA NA

27 GTL Infrastructure 18-Nov-08 USD 50.4 29.0 Nov, 2012

28 Guj. NRE Coke 17-Nov-08 USD 85.4 21.5 April, 2011

29 HDFC 18-Nov-08 USD 97.7 14.1 Sep., 2010

30 Hotel Leela Ventures 18-Nov-08 USD 99.8 11.6 April, 2012

31 India Cements 18-Nov-08 USD 93.2 20.5 May, 2011

32 ISMT NA NA NA NA NA

33 IVRCL Infrastructure 18-Nov-08 USD 87.0 25.7 Nov, 2010

34 Jain Irrigation 18-Nov-08 USD 95.3 16.8 March, 2011

35 Jaiprakash Associates 18-Nov-08 USD 56.9 28.5 Sept, 2012

36 Jindal Saw NA NA NA NA NA

37 Jindal Stainless NA NA NA NA NA

38 JSW Steel 18-Nov-08 USD 50.8 30.8 June, 2012

39 Jubilant Organosys 18-Nov-08 USD 65.3 33.8 May, 2012

40 Karuturi Global NA NA NA NA NA

FCCB


13

Sr.No. Company name Last quote Currency Price Yield Maturity date

41 KEI Industries NA NA NA NA NA

42 KLG Systel NA NA NA NA NA

43 Lupin NA NA NA NA NA

44 Mahindra & Mahindra 18-Nov-08 USD 81.1 20.0 April, 2011

45 Man Industries NA NA NA NA NA

46 Mascon Global NA NA NA NA NA

47 Mercator Lines NA NA NA NA NA

48 Moser Baer 18-Nov-08 USD 23.3 63.4 June, 2012

49 Orchid Chemicals 18-Nov-08 USD 86.4 29.3 Nov, 2010

50 Panacea Biotec 28-Oct-08 USD 91.2 31.7 Feb. 2011

51 Pidilite Industries NA NA NA NA NA

52 Prithvi Information NA NA NA NA NA

53 PSL 18-Nov-08 USD 105.4 18.0 Aug. 2010

54 Punj Lloyd 18-Nov-08 USD 85.3 17.0 April, 2011

55 Rajesh Exports 18-Nov-08 USD 62.3 28.6 Feb, 2012

56 Ranbaxy Laboratories 18-Nov-08 USD 92.4 14.1 Mar, 2011

57 Reliance Communications 18-Nov-08 USD 72.6 23.6 May, 2011

58 Reliance Natural Resources NA NA NA NA NA

59 Rolta India 18-Nov-08 USD 60.2 26.5 June, 2012

60 S Kumar Nationwide 22-Oct-08 USD 89.5 17.6 April, 2011

61 Sintex Industries 14-Oct-08 USD 92.5 7.9 2013

62 Sterling Biotech 18-Nov-08 USD 102.3 16.1 Sept, 2010

63 Strides Arcolab 18-Nov-08 USD 77.0 19.2 June, 2012

64 Subex 14-Nov-08 USD 32.5 52.0 Mar, 2012

65 Suzlon Energy 18-Nov-08 USD 43.6 36.8 June, 2012

66 Tata Chemicals 18-Nov-08 USD 97.3 19.9 Jan, 2010

67 Tata Motors 18-Nov-08 USD 46.7 30.6 July, 2012

68 Tata Power NA NA NA NA NA

69 Tata Steel 18-Nov-08 USD 81.4 12.3 Sept, 2012

70 Tata Teleservices (Maharashtra) 12-Nov-08 USD 99.5 37.6 July, 2009

71 Tulip Telecom 18-Nov-08 USD 49.0 30.9 Aug, 2012

72 United Phosphorus 18-Nov-08 USD 93.9 17.4 Jan, 2011

73 Wockhardt 18-Nov-08 USD 107.3 21.4 Oct, 2009

74 Zee Entertainment 18-Nov-08 USD 105.0 24.9 April, 2009 Source: Bloomberg, Edelweiss research



14

Annexure 1: The following companies have been excluded from the universe of BSE 500

Aftek Infosys

Assam Company

Bharti Shipyard

Bilcare

Country Club

Era Construction

HEG

Hindustan Construction

ICSA India

Monnet Ispat

Motherson Sumi

Nava Bharat Ventures

Prajay Engineering

Prime Focus

Radico Khaitan

Spicejet

United Spirits

Videocon Industries

FCCB


15

NOTES:

Recent research

Naresh Kothari Co-Head Institutional Equities [email protected] +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities [email protected] +91 22 2286 4206

Shriram Iyer Head Research [email protected] +91 22 2286 4256

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20-Nov-08 Television Eighteen – Annual Report Analysis

12-Nov-08 Tata Chemicals – Annual Report Analysis

12-Nov-08 Reliance Infrastructure – Annual Report Analysis

08-Nov-08 Aban Offshore – Annual Report Analysis

07-Nov-08 Jindal Steel and Power – Annual Report Analysis

06-Nov-08 Lanco Infratech – Annual Report Analysis

04-Nov-08 NTPC – Annual Report Analysis

20-Oct-08 Sterlite Industries – Annual Report Analysis

15-Oct-08 DLF – Annual Report Analysis

14-Oct-08 Havells – Annual Report Analysis

8-Oct-08 Usha Martin – Annual Report Analysis

1-Oct-08 Tata Power – Annual Report Analysis

1-Oct-08 Dr. Reddy’s Laboratories – Annual Report Analysis

26-Sep-08 Jaiprakash Associates – Annual Report Analysis

24-Sep-08 Maruti Suzuki - Annual Report Analysis

19-Sep-08 HDIL- Annual Report Analysis

19-Sep-08 JSW Steel – Annual Report Analysis

Date Title

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16

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