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The Falling Rupee and the FCCB problem


Given the Rupee-Dollar is now at 45.5 or something obscene, it brings one to think about what might happen.

Exporters benefit by getting more rupees. One usually thinks this is great for IT. But a majority of them have hedged big time, and the hedging will definitely last one quarter, so net-net they see little value. Do you know an IT company that has not hedged?

But textile exports are likely to benefit, since a number of these people did not hedge much. I would imagine that cheap garments will be in demand in a slowing world economy. Also, textiles are hugely impacted by crude – which has come down drastically, offsetting the rupee rise. So they should be great – have to find the good pieces in there. Mudra Lifestyle – a stock I own – is one of them.

Importers get hit bad. Who are the importers really? The oil marketing companies – HPCL, BPCL, IOC – are actually a positive because oil dropped a lot more than the rupee rise. (30% to rupee’s 10%) Who are the rest? I’m sure engineering companies, banks and telecom providers have dollar imports which will have a seriously negative impact given this dollar rise.

What about FCCBs? With the fall in the market, many FCCBs have gone under water – i.e. they no longer are “in the money”, with stock prices falling below conversion prices. Business standard has a list of many companies that have hugely dropped below conversion prices.

When the price is below the conversion price, no one will convert, and it’s likely these companie shave to return the money instead of assuming it will get converted. Some companies like JP Associates have a pretty big amount of money out there – JP has $400 million, convertible around Rs. 247. Current price is Rs. 170. Now this hasn’t been really accounted for as debt in many cases – the rate of interest is fairly low, around 7-8%, but even that has not been accounted because there was an assumed conversion (the investors won’t get any interest if they choose to convert).

A hold-to-maturity situation is bad for some of these companies. If these companies actually accounted for the debt, their net profits would be badly hit. I think they got away because the stock price was above the conversion price. What now? Will they be forced to take it on as debt given the conversion isn’t likely? If so, will they take a huge one-time hit?

And with the dollar rising against the rupee, will there be a big impact, even for those that did account for it, like Bharti and L&T?

Who are the worst hit? I don’t have a list of FCCB issuers handy but this should be interesting. Fodder for my Short only Strategy.


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