United Spirits Ltd is in the market again for funds. Heavy drinkers know how awful hangovers can be. United Spirits too faces the morning-after problem. With great fanfare, it spent more than a billion dollars in acquiring Whyte and Mackay Ltd in 2007. While this added to the company’s debt, the performance of the Scottish company has not been up to expectations.

Photo: Bloomberg

On the face of it, United Spirits’s decision to raise up to $225 million through foreign currency convertible bonds (FCCBs) should cheer investors. After all, as Ravi Nedungadi, chief financial officer of the UB Group, said, the company is proposing to raise the funds at single-digit interest rate. That will result in 50% interest savings, he said. But a look at the stock’s performance shows investors are far from impressed. The stock was flat on Thursday, after having dropped nearly 60% year-till-date.

While debt servicing hasn’t been much of a problem for United Spirits so far, it is something investors are concerned about. At the end of the September quarter, the firm had a consolidated debt of 7,750 crore.

The comforting sign is that the company’s performance recently has been decent. United Spirits’ numbers were boosted by an 8% volume growth in the second quarter. So, in the half year ended September, the firm’s consolidated earnings before interest, taxes, depreciation and amortization (Ebitda) rose 17% to 748 crore. That is despite Whyte & Mackay reporting a 20% decline in Ebitda and a 4.7 percentage point decline in Ebidta margin from a year ago. But more than half of this number, or 369 crore, was eaten away by interest payments.

United Spirits plans to raise the FCCB funds in January. It has not disclosed the pricing of these bonds, something which will be a difficult process given that there is no visibility on the rupee and equity prices. But given that redemptions would be at least three years from now, perhaps the company is hoping to ride out the storm. The stock price, of course, reflects another story.