Automobile firm Mahindra and Mahindra Ltd’s (M&M) choice of instrument to raise long-term funds is interesting. It is the first major convertible issue in recent times that is denominated in rupees. The Rs700 crore worth of debentures are compulsorily converted after 18 months, if the bond owners have not already chosen to convert.
The fact that the bonds are in rupees means the company does not have any foreign exchange risk, unlike foreign currency convertible bond (FCCB) issues, where companies have to hedge the risk of adverse currency movements. Since the bonds are compulsorily convertible, there is no risk of them ending up as debt on M&M’s books.
After the correction in stock prices since January, a number of FCCB issuers now face the prospect of their bonds ending up as debt, as the conversion price is way higher than the current market price.
V. Jayasankar, executive director at Kotak Mahindra Capital Co. Ltd, says the instrument should be viewed as equity with deferred dilution. The conversion price of Rs745 is at a premium of about 17% to the price of Rs635 a week ago, while the coupon rate on the bond is 9.25%.
With FCCBs, the conversion premium is generally higher and the interest cost much lower, but the instrument has other benefits for M&M. With a qualified institutional placement (QIP), the company wouldn’t have managed any premium on the prevailing market price. The transaction, therefore, fits well with M&M’s fund-raising plans.
The company has plans to spend about Rs7,000 crore in three years, mainly to expand capacity and to build a commercial vehicles factory.
But cash flow from operations is expected to be only around Rs1,100 crore a year, according to an analyst with a domestic brokerage. Raising funds, therefore, is an imperative.
While the company has started the process with an equity transaction, the next tranche could well be debt, considering an extremely low debt-equity ratio of about 0.14 times. The current investment phase, coupled with a slowdown in the auto industry, has impacted M&M’s shares negatively, but some analysts feel the stock is now attractively valued, especially considering the value of the company’s subsidiaries.
More on State Bank’s results
To understand just how much lower employee costs contributed to the State Bank of India’s profits, here are the numbers.
While operating profit has increased by Rs403.97 crore in the March quarter compared with a year ago, the decline in staff expenses has been Rs454.27 crore. Also, net profit has risen by Rs390.04 crore.
In other words, the reduction in staff expenses explains the entire jump in operating and net profits. Write-backs of pension and gratuity provisions have helped achieve this truly extraordinary feat.
Unfortunately, it also means that apart from the reduction in employee costs, operational performance has actually been nothing to write home about.
Incidentally, while bad debts have gone up, provisioning has not risen by the same amount. The upshot is a decline in the provision cover from 47.28% at the end of December to 42.17% at the end of March.
But while there’s not much reason for the stock to go up on the back of these results, the money raised from its rights issue will expand margins and help the bank post better results in the next quarter.