Sintex has recently redeemed the Foreign Currency Convertible Bonds (FCCB) worth USD 292 million. This has been an overhang on the stock for sometime. Sunil Kanojia, Group President, Sintex told CNBC-TV18 that to redeem this, the company has taken both the equity and quasi debt routes.
Going forward, he expects the debt to come down by about Rs 300 crore and the working capital to soften up. "Working capital will come down by 25 days, from 180 days," he said.
Company's financial position was impacting its return ratios adversely. However, now Kanojia wants to assure investors that company’s financial health is sound.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: You have recently redeemed the important Foreign Currency Convertible Bonds (FCCB) which have been an overhang on the stock for sometime now. How much will this help in bringing down the company’s debt?
A: We have taken both the routes which is equity and quasi debt, FCCB. So to redeem USD 292 million of FCCB we have taken USD 140 million from another step down FCCB and the other is equity route, of which 10 percent is to be taken by the promoters by way of warrants and another 10 percent is qualified institutional placement (QIP). We have got Rs 1,075 crore in this financial year.
We already had Rs 800 crore to redeem about Rs 1,650 crore of the liability. This has already been paid off now, so that is off the books. However, going forward there will be two things, one that the debt-equity ratio will reduce, so debt should come down about Rs 300 crore, that is one.
The working capital will also soften, because we have been going very cautious on our execution of monolithic business which is sticky in terms of debtors, so we are likely to reduce the number of days on working capital cycle as well which had gone up to 180 or so. We will bring it down by at least 25-30 days in this financial year. Two ways there will be reduction in the debt and as far as FCCB is concerned that is off our shoulders now.
Q: You have also done a QIP or an equity raising, what kind of dilution did you have?
A: This particular FCCB is a step down which will have 7.5 percent coupon paid semi-annually for the first two years and then for the next three years it will be 3.75 percent. So the bondholders would like to hold it as bond initially for the first two years rather than going for the equity because they get better returns on it. It is like a pure debt. For the first two years you can treat it as an external commercial borrowing (ECB) which is an unsecured ECB.
The dilution will primarily happen from the QIP that we did in this financial year and by the promoters’ warrants. So, in the first year we have a dilution of 13 percent, next year it will be about 4 percent and then between 3 to 5 years of the FCCB close to about 20-21 percent dilution. This is in a phased manner and will not happen in one go. Therefore, the advantage is that as the profitability will increase and the return on capital (ROC) is also likely to increase the dilution would not have so much impact on the earnings per share (EPS) growth. What we have factored in is that the EPS growth would always be higher than the dilution that will happen over time. Investors will not suffer in terms of seeing that the equity dilution will actually impact on the EPS dilution.
Q: You have highlighted that this is a step down FCCB. However, the conversion price seems to be at a significant premium to your current market price. Could you highlight the reasons for this?
A: This is at Rs 75.6 conversion price which is 15 percent premium on the price prevailing at that time. These prices are all calculated on the basis of the stock price performance during that period when we came out with. Eventually, we needed to go ahead with our fundraising program and to ensure that the FCCB of USD 292 million that we had in our hand was redeemed and we did not want to take any chances. That is why we have taken the route of both equity as well as debt. Though we had the option of going for a plain ECB, we realise that we will be replacing unsecured loan which was in FCCB by a secured loan.
We would not have any headroom for any further expansion program and also want to make an access to the capital market once in four to five years and have now taken care of it. We did take a decision whereby focus was largely the debt-equity ratio to reduce from gross debt to equity, let it be 1.2 to 0.8 now, also at the same time debt to EBITDA ratio also has to reduce significantly and it should not be more than 3 that is our aim.
To take up the capital efficiency ratios, written on capital employed at least in the range back to 19-20 percent plus and at the same time the company will have internal cash accruals starting from this financial year. So there were multiple objectives that we had in our mind. We wanted to improve profitability, at the same time we wanted to make our balance sheet look thinner and while doing this we had to take the step off having both equity as well as FCCB. While we had FCCB, we made sure that it is on a step down basis so that we do not have an impact on equity dilution at least for the first two years.
Q: Given the difficult operating environment for most companies in the infrastructure and capital goods space in general challenges of cash crunch, slow order book, do you think such a quantum increase in loan plus equity, a hit in earnings is a wise strategy?
A: In the end either you pay a larger interest. We realised that if we had gone for a plain ECB even then the cost as well as the hedging both together was not cheaper, it was not available. So the interest cost would have ballooned up significantly. Now we will be reducing the interest cost, so there would be saving from the interest cost. We did a lot of simulations of various combinations. In the end we realised that the decision that we have taken is better.
Q: As the management you have maintained your guidance. You have successfully redeemed your FCCBs as well. The slide in the stock price has actually been a lot, nearly 52-week low everyday. Is there something extraordinary which is bothering the investors causing the fall in the stock price? Is the erosion in shareholder value a cause of concern for the management?
A: I quite agree with you. As far as company is concerned, there is absolutely nothing wrong in terms of any negative surprises building up in the company. Everything is as per what we have been sharing with the investors and there is a consistency of what we have shared in the past and what we have talked about in terms of guidance and that is how it is emerging. There is nothing negative happening in the company, but there has been something wrong with the midcap stocks at this time as far as liking of investor is concerned.
Our stock has also been bundled along with the others and it happens sometimes in the stock market. I do not think that concerns us, but at this forum I can assure my investors that there is nothing wrong in the company. We are meeting our guidance and the business which was good in Q3 will be better in Q4.
We are working towards mitigating the risk of being focused on one segment or one geography. Therefore, we are working towards ensuring that we will not be swept off by any particular segment getting hit by any macroeconomic situation, but we are well-diversified. We are across multiple market segments. We work for masses. We also work for Fortune 500 customers.
We have entire range available with us across multiple market segments and as a company there is nothing wrong internally with Sintex. Structurally, it has become very strong post our fundraising program and that should reflect in the financial year result for 2013 and going forward we will further build up on our growth on 2014.