Firstsource Solutions Ltd has managed to find a saviour just in the nick of time. Kolkata-based power utility CESC Ltd has agreed to infuse Rs.274.5 crore ($51 million) into the company through a preferential share allotment, just 40 days before the repayment of its $237 million convertible bond becomes due.
Firstsource has roughly $140 million in cash already, and CESC’s infusion will take it much closer to its repayment target. The shortfall can be easily made up through additional loans from Firstsource’s existing lenders, especially with CESC now backing the company.
Just two weeks ago, credit rating agency Crisil Ltd had downgraded its rating citing “reduced financial flexibility to refinance the shortfall of around $85 million of the foreign currency convertible bonds falling due for redemption on December 4 2012”.
Crisil added that bank financing of the shortfall appears less likely now, and the company was considering an exchange offer with the bondholders.
CESC will spend another Rs.120 crore ($22.5 million) to buy part of the shares held by three existing investors, including ICICI Bank Ltd. It has also set aside Rs.242 crore ($45 million) to make an open offer to buy shares amounting to 26% of the company’s expanded share capital. The offer will be made at Rs.12.2 per share, the same price the company will pay to ICICI and two other financial investors.
Firstsource trades at Rs.14.25, having risen from around Rs.9 a month ago on rumours of an acquisition. If most investors hold on to the shares expecting greater returns under CESC’s control, the amount set aside for the open offer could well find its way into Firstsource’s books and help it further reduce leverage.
The $45 million question is if investors will tender shares in the open offer. There’s little doubt that the convertible bond repayment acted as a huge overhang over the stock. With this concern being largely addressed, the company can breathe easy and focus on operations.
Besides, the company won some large deals last year (worth $160 million), and this is expected to result in an increase in revenue growth rates this fiscal. Firstsource has also managed to improve margins from the nadir they had reached in the December 2012 quarter, thanks to some cost rationalization initiatives.
Having said that, the company is not completely out of the woods. While it may successfully repay its convertible bondholders, repayment on its $180 million external commercial borrowing will commence in June 2013, according to Crisil.
If CESC limits its cash infusion into the company at $51 million, the company’s leverage would increase even more. Also, the fact that existing large investors have been willing to sell at a relatively low valuation doesn’t bode well. Brokerage Aditya Birla Money expects the company’s earnings per share to nearly double to Rs.2.7 in financial year 2012-13 and to rise to Rs.3 in FY14 on the back of better revenue flow from the recent deals, as well as cost rationalization initiatives by the company. This translates into a FY13 price-earnings ratio of just 4.5 times.
The company has been saying that things have been improving since early this year. If profit and cash flow improve as envisaged Firstsource could well generate healthy returns for investors who hold on.