FCCB issuers outshine market

Stocks of Indian companies that have issued foreign currency convertible bonds (FCCBs), which are currently trading at huge discounts to their conversion prices, have outperformed the market in the current rally.

The average returns of 161 FCCB issuers since March 9, 2009 are at 62.21 per cent compared to 43.46 per cent of the Bombay Stock Exchange's (BSE) 30-stock Sensex and 41.68 per cent of 2,850 actively-traded companies.

Out of the 161 FCCB-issuing companies, 45 per cent of the firms or 73 firms posted returns of 87.24 per cent in the last two months. But the remaining 88 issuers, who underperformed the market, gained 35.37 per cent.

Currently, most of the FCCBs are quoting at discounts at an average of 52 per cent over conversion prices. The stocks of several companies that have issued FCCBs have fallen significantly due to concerns over debt payment, underscoring the possibility of their non-conversion during the recent market crash.

However, the present sharp rally has seen a large outperformance by the stocks of leveraged companies, which may help to narrow down the gap between the current stock prices and conversion prices. For instance, the stock price of Surana Industries increased by 203 per cent from Rs 41.30 on March 9 to Rs 125.10 on Tuesday. The conversion price of its FCCB is Rs 140.

The stock prices of 14 more companies — Suzlon Energy, HCC, Bajaj Hindusthan, Gitanjali Gems, Welspun Gujarat, ICSA, Sintex Industries, JSW Steel, Webel Sl Energy, Jaiprakash Associates, Country Club, Simbhaoli Sugars, Core Projects and Deccan Chronicle — have more than doubled in this rally.

Share prices of top FCCB issuers such as Reliance Communications, Tata Steel, Tata Motors and Reliance Natural Resources have increase between 75–100 per cent. The trading volumes of these companies on the bourses have more than doubled in the last two months.

If the market price increased, the company could convert it into equity or else they would redeem it at a premium. The current market rally provides an opportunity to many corporates to rationalise their capital structure through equity issuances.

In the past few years, many Indian companies preferred the FCCB route to take advantage of the rising market value to raise funds as it benefited both the investors and issuers.

A total of 161 companies, which have outstanding FCCBs worth $17 billion, had mobilised almost $18.50 billion between 2004 and 2008.