Stay away from shares of companies that have high overseas investor holdings or foreign currency convertible bonds due for conversion soon
In the past year, a combination of domestic and global problems pushed the markets and the rupee down. While the markets lost over 10 per cent, the rupee depreciated 22 per cent against the dollar. Since January 2012, both the markets and the rupee have lost over five per cent each.
Sudip Bandyopadhyay, managing director and chief executive officer of brokerage firm Destimoney Securities, says under such circumstances, new investors should be a little careful while choosing stocks. “If either markets or the rupee was gaining while the other was falling, it wouldn’t have been a concern. That’s not the case here. Hence, new investors should be careful about certain stocks,” he says.
For instance, be careful about companies that have large foreign institutional investor (FII) holdings, Bandyopadhyay says. Reason: FIIs will pull out money from such stocks if the Reserve Bank of India (RBI) does not take drastic measures to stem the rupee’s fall, resulting in the stock price crashing. According to data from the Bombay Stock Exchange (BSE), FIIs hold 76 per cent in Essar Oil, 71 per cent in Housing Development Finance Corp (HDFC), 63 per cent in ICICI Bank, 53 per cent in Infosys Tech and 57 per cent in both Apollo Hospitals and Jain Irrigation (as on March 2012).
New investors could also avoid companies that have foreign currency convertible bonds (FCCBs) coming up for conversion any time soon because the company will have to convert the bonds at the current rupee rate (against many other currencies) and incur losses. The highlight of an FCCB is that the price for converting the bond into equity is determined at the time of the issuance. But, as the markets have fallen, the share price of such companies, too, have fallen, as a result of which the FCCB holders may not want to convert the bonds to equity. Instead, they may ask for repayment of their money at the present rupee level, which is much higher. For instance, Suzlon Energy’s FCCB issue in 2007 was fixed at Rs 44.60. If the bondholders opt for repayment, the company will have to shell out Rs 11 extra per bond ($1 = Rs 55). FCCBs of Suzlon, JSW Steel, Tata Motors, Tata Steel and Jaiprakash Associates are maturing between June and September this year, according to BSE data.
Under such circumstances, it is beneficial for the company to get the conversion date extended, says Alex Mathew, head of research at Geojit BNP Paribas Financial Services. Be careful if you hold shares of companies where FCCBs may soon come up for conversion, he adds.
Also, look at the export and import bills of companies. If a company has revenue losses due to heavy imports or exports, avoid the stock. For example, in the case of tyre companies, some automakers and information technology outsourcing companies, although most of the dollar earnings of these companies are hedged, such hedges are capped and they do not cover the full depreciation of the rupee.
According to data from BSE, Indian Oil Corp earns five per cent of its net sales in foreign currency (from exports) but spends 52 per cent on imports. Steel Authority of India earns two per cent of net sales in forex deals and spends 31 per cent. Similarly, Rajesh Exports earns 88 per cent and spends 100 per cent, respectively.
Existing investors should take a relook at their investments and consider reshuffling scrips that are highly leveraged or do not have supportive fundamentals.
“Say, a company has high FII holdings but does not have good fundamentals; stay away from it. The problem with investors is that they do not look at the opportunity cost of money that they invest. For instance, one has invested in stock A at Rs 100 and now it is down at Rs 80. The investor will look at the absolute cost, thinking he will exit since he will be incurring losses. Instead, he should see where else he can put that money and earn better returns,” says G Chokkalingam, chief investment officer and executive director at Centrum Wealth Management.
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