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Monday, May 17, 2010

INDIA's FIRST IDR: THANKS TO STANDARD CHARTERED BANK PLC.


Standard Chartered PLC (STAN: LN) Bloomberg is all set to be the first foreign company to list in India through an Indian Depository Receipts (IDR) issue. India is the most profitable unit after Hong Kong. StanChart as it is called in short will offer to sell 24 crore IDR’s through public issue on May 25th 2010.

The issue will be 10 IDR = 1 share of Standard Chartered Plc of US$ 0.50. Like Global Depository (GDR’s) & American Depository Shares (ADS’s), IDR are the derivative instrument with shares as the underlying asset, they allow foreign companies to raise money in India.

StanChart expects to raise $500-$750 million (Rs 2250-3375 Crs). Calculation shows that an issue price of Rs 105-115 per share. This will be Stan Chart’s 3rd listing after London & Hong Kong & its next stop is Shangai.

StanChart is in India from 1858 in Kolkata; here it has 94 branches across 37 cities with over 20 lakh customers. It wants to show its commitment towards India which contributes 12 % of its global revenues. StanChart’s Net Profit grew 30 % CAGR in last 3 yrs, while Profit before Tax grew by 38 %. Base on 2009 results, StanChart’s Price to Book = 2 times, much better than 2.5 times of SBI. P/E at 14.6 times v/s 15.7 of SBI & 29.4 of HDFC Bank. Price band will be announced by May 24th 2010 depending on the closing price of the shares listed in UK.

What does IDRs means to an Indian sharesholders in terms of Taxations.....

Like Global Depository Receipts (GDR’s) & American Depository Shares (ADS’s), IDR are the derivative instrument with parent companies shares as the underlying asset, they allow foreign companies to raise money in India. An IDR holder acquires the same rights as a shareholder, except that he/she can neither attend the AGM nor vote on resolutions. NRI’s can trade in the IDR’s.

The biggest question doing the rounds is – what could be the tax implications for the Indian IDR holder? The good news is that IDR does not come under the purview of Securities Transaction Tax. But the IDR holder will have to pay tax on the dividend income earned. It is not yet clear whether the tax payable would be equal to the Dividend Distribution Tax which for the current fiscal stands at 16.61%. So tax seems sure but the rate is yet unsure.

Then there is the question of short and long term capital gains tax?
Currently, Long term gains made from Indian Stock Exchanges (stock held for more than 12 months) is completely exempted from tax while Short term capital gains tax (held less than 12 months) stands at 15%. But the IDR does not fall under the STT, so maybe it will not enjoy the same benefits as the shares listed on the Indian Exchanges enjoys. So this means that IDR’s will be taxed like any other asset –long term tax- held for over 36 months would be around 20%. Short term tax, when asset is held for less than a year, will be like regular income earned, at 30.9%.
There is no real clarity yet on this treatment of tax but surely, the Govt will have to bring a notification soon. A quick resolution on the tax angle is urgent and imperative or else it could undermine the very lure of this IDR.

According to the red-herring prospectus, the legal regime for IDR’s is still to be tested; investors in IDR’s may not get the benefits of a bonus issue or a rights issue; Even dividend income on IDR’s will be taxed in the hands of the investors and long-term capital gains tax will be another additional burden. Standard Chartered Bank has said whenever the company and/or the depository is unable to make bonus issues or rights issues available to the IDR holders, the depository will try and sell the deposited property that is the subject of the distribution on behalf of the IDR holders and distribute the net proceeds thereof as a cash distribution to the IDR holders.

Standard Chartered said it has agreed that for all corporate actions including voting, rights issues, the payment of dividends and other distributions, it will treat IDR holders on an equitable basis vis-à-vis other holders of shares in the home country (the UK). However, it pointed out that in circumstances where certain corporate actions, which are available to the holders of shares in the home country of the company and other jurisdictions where its shares are listed, are not permitted by Indian laws to be offered to IDR holders.

There is also a term called "Fungibility", now what does this means & how it relates to IDR/ADRS ?
The actual meaning of the word fungible is the ability to substitute one unit of a financial instrument for another unit of the same financial instrument. However, in trading, fungibility usually implies the ability to buy or sell the same financial instrument on a different market with the same end result.


Its a financial instrument (i.e. individual stock, futures contract, options contract, etc.) is considered fungible if it can be bought or sold on one market or exchange, and then sold or bought on another market or exchange.

For example, if one hundred shares of an individual stock can be bought on the NASDAQ in the US, and the same one hundred shares of the same individual stock can be sold on the London Stock Exchange in the UK, with the result being zero shares, the individual stock would be considered fungible. There are many fungible financial instruments, with most popular being individual stocks, some commodities (e.g. gold, silver, etc.), and currencies.

Fungible financial instruments are often used in arbitrage trades, because the difference in the price (the arbitrage part) often comes from a difference in location (the fungible part). For example, if the Euro to US Dollar exchange rate was 1.2500 in the US and 1.2505 in the UK, an arbitrage trader could buy Euros in the US, and then immediately sell Euros in the UK, making a profit of 0.0005 per Euro (or $5 per €10,000), because Euros are a fungible financial instrument. Similarly it implies to Stocks IDRs etc.

Monday, May 10, 2010

Suzlon's FCCB holders waives fine...Sets conversion price of Rs.95-100/sh.

Suzlon Energy had sought for the waiver of penalties that have accrued for breaching terms and conditions set by investors in its Foreign Currency Convertible Bonds. The penalties was amounted to 10 per cent of FCCBs, or $30-50 million. Suzlon told the exchanges that it has managed to remove covenants which was required to fulfil under the FCCB agreement in the meeting of bondholders,on April 29, 2010. The company proposed extraordinary resolutions in relation to the trust deeds and certain terms and conditions of the bonds, including the removal of financial covenants and waiver of any existing or prior breaches.

It has been learned that these two sets of FCCBs worth $300 million Zero Coupon Convertible Bonds(due JUNE 2012) and $200 million Zero Coupon Convertible Bonds(due OCT 2012), have three main financial covenants. First, Net borrowings to tangible Networth cannot be more than 1.5 times. Second, full-year EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) cannot be less than 1.33 times the debt service coverage requirement, ie, repayment and service cost. Third, Net Borrowings to Net EBITDA should not be more than four times.

Just to remind that the profit of the company has been under pressure for the last three quarters and hence, it has not been able to meet the Net borrowings to Net EBITDA margin,” this was a concern for FCCB holders as this invited penalty from bondholders. It has been learnt that, the company is not expecting an increase in EBITDA in coming quarters. EBITDA will continue to fall for the coming quarters. Suzlon reported an Ebitda of Rs 408 crore in the 9 months to December 31, down from Rs 1,996 crore a year earlier.

Suzlon has reset the conversion price of bonds between Rs 95-100 per share.Suzlon will become the first company to reset the conversion price of FCCBs after the ministry of finance relaxed the guidelines for companies to price their bonds based on share prices of the past six months. Suzlon will pay 1% fees to bondholders for the waiver. Earlier conversion price was Rs.360-370 per share.The covenants have been relaxed for the entire tenure. This new price is likely to result in a dilution of 15.05% for the company. UPDATE- (Set the price Rs.97.26/sh)

Since, Suzlon has already sold its 23,60,00,000(35.22%) depository interest in Hansen Transmissions International NV - HSN:LN held by AE Rotor Holding BV a wholly owned indirect subsidiary of Suzlon Energy Ltd at the price of 95 pence per Depository Interest amounting to USD 350 million, with a locking period for 6 months for the remining stake of 17,46,32,079(26.06%), Which is about to complete by this MAY 2010,this will pegg Suzlon some what around Rs.1000 crs,this will substantially help Suzlon to reduce its current debts of Rs.10,488 crs.

It is awaiting approval from the Reserve Bank of India for the FCCB restructuring.

Wednesday, April 21, 2010

Talwalkars Better Value Pvt Ltd : TBVF

Price Band - Rs.123-128, Face Value- Rs.10
Issue opens on - 21th April 2010, Wednesday
Issue closes on - 23th April 2010, Friday
QIB Book - 30,25,000 shares (50% of Net issue)
HNI Book - 9,07,500shares (15% of Net issue)
Retail Book - 21,17,500 shares (35% of Net issue)
Total No. of Shares offered - 60,50,000 shares or 25.09%
Equity Shares outstanding after the Issue - 2,41,15,672 Eq Sh
Equity Shares outstanding prior Issue - 1,80,65,672 Eq Sh
Total Size of the Issue- Rs. 74.42 Crs. - Rs. 77.44 Crs.

Talwalkars Better Value Pvt Ltd (TBVF) - Commonly famous as Talwalkars, is India’s largest chain of health centers. The company established in 1932, it operates 58 health clubs in 28 cities, serves 55,000 clients in India.Hence demands premium. Talwalkars were the Official Fitness Partners for Standard Chartered Mumbai Marathon in 2008 and 2009 and Femina Miss India Contest in 2009.

The proceeds will be used for setting up of 27 additional health clubs about Rs.50.22 cr and repaying certain unsecured loans of Rs. 20.59 cr. The issue will constitute 25.09% of the fully diluted post issue paid-up capital of the company. Promoters’ stake will be reduced to 59.39% and non-promoters to 15.42% post issue.

At upper band of Rs.128 the stock is available at 53.9x the P/E & 2.6x the P/Bv based on FY10 post issue EPS of Rs.2.4 & BVPS of Rs 48.6. For the year ended on 31st March 2009 company reported PAT of Rs.5.687cr on total income of Rs.59.424 crs, For the period ended in April-September 2009 ,Company posted PAT of Rs.31.90 cr on the total income of Rs. 358.82 cr.

CARE has assigned an IPO Grade 3 to Talwalkars Better Value Fitness Ltd IPO. This means as per CARE company has 'Average Fundamentals'. CARE assigns IPO grading on a scale of 5 to 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals.

TBVF IS AT EXPENSIVE VALUATION: BUT GOOD BUSINESS
The company has set a price band of Rs 123 to Rs 128 per equity share of Rs 10 face value. At the lower band of Rs 123 per share, the P/E would be 51.6 times the annualized EPS of Rs 2.4 for the nine months ended December 2009 (on post-IPO equity) and 82 times the EPS of Rs 1.5 (on post-IPO equity) for FY09. At the upper price band of Rs 128 per share, the P/E would be 54 times the annualized EPS for the nine months ended December 2009 and 85 times the EPS for FY09. There is no comparable listed company. The very high valuation already factors in very high growth rates in future.

Friday, April 2, 2010

A LITTLE STORY ON MARKETS (On Request)

There was a small village, everyone there were living happily, one day someone from the big city came with his assistant, he announced that - "I will give Rs. 10 each for every monkey you catch and bring it to me", now the villagers started catching monkeys, soon villagers found a new job. They caught monkeys and sold to that stranger & made good money, after a short while villagers lost their interest. The stranger again announced that - "I will give you Rs. 15 each for every monkey", more monkeys came in, after a while the price of monkey went up to Rs. 60 !!! Suddenly one day the stranger was out of the village & his assistant said - "Look this guy does not pays me much, I want to sell all his monkeys at Rs. 50 each so when he comes back you can sell it back to him for Rs. 70" - the villagers agreed -The assistant sold all the monkeys to the villagers for Rs. 50 and went out of the village. Villagers were now left with their monkeys & still waiting........for the Stranger and his assistant to come... but none of this two came back & left villagers with their monkeys worth nothing...while that strangers made money out of nothing....

THE MORALE OF THE STORY - 
The villagers are we small Investors , our stocks are the monkeys and FII’s (Foreign Institutional Investors) are those strangers !!!
Do learn the lesson from this game.. and Invest safely, invest in good business and for long term... 


REGARDS








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