Sintex decline: No notional blow this

Sintex has witnessed a 21% decline, from Rs140 to Rs110, in a matter of two trading days. Apart from the weak sentiment prevalent in the market, one of the key reasons for the fall is that the company will be providing mark-to-market losses for its outstanding FCCB exposure in the second quarter numbers.

Analysts are expecting the company’s profit to drop nearly 30% for September 2011 over previous year. According to a JP Morgan report, though operating profit of the company will rise 18%, its net profit will be impacted due to provisioning for this debt.

Sintex raised nearly $225 million in 2008. It has spent $60-$65 million on overseas acquisition and around $30-35 million is deployed in Indian currency deposits. Over $125 million of the fund raised remains unhedged and open. With the currency depreciating from 44.5 against the dollar to 49.5 (almost 11%), the company will have to make provisions for around $5 million.

There is a general perception that the company might face difficulty in repaying the FCCB. However, with its existing cash levels and value of short-term investments along with a strong cash generation for the year at around $58 million, there should be no such difficulty.

What the issue highlights, however, is the unhedged position, which makes a complete mockery of the logic that FCCBs are one of the cheapest sources of funds. The recent depreciation of the currency has made these funds costlier than those available in the domestic markets. As has been proved over the last three years, these international loans have a capacity of derailing the equity market story. Being pegged to the performance of equity markets, these instruments amount to self-destruction at a time of wild currency market swing.

While Sintex has been more transparent by providing such mark-to-market losses, other much more vulnerable companies are not doing so.

As was the case with Marico, which was transparent enough to call the bluff by issuing a profit warning, other companies have not been so forthcoming. However, stocks across the sector fell after Marico announced its profit warning. This move in Sintex will also be reflected in other stocks.