Firstsource Solutions from the ICICI Stable sinks below Face Value Rs 10….Why !?

Thx Anup for your response in the earlier Larsen Blog where you also requested for my view on Firstsource Solutions as it’s share price sunk to Rs 9.75,below face Value of Rs 10 for the first time ever 

I hope this blog gives you some clarity on this Company

It was clearly an Opportunistic IPO at a Heavy Premium in Bullish Times….Despite a Networth of just Rs 100 crs,excluding Goodwill,Firstsource Solutions managed to raise Rs 384 crs ,offering shares at a Price that was nearly 30 times the Earnings

Even the Objects to the Issue were General…Rs 180 crs for Acqusitions that were yet to be identified,Rs 45 crs to repay a Loan from ICICI Bank.Rs 46 crs for creating New facilities,Rs 89 crs for General Corporate Purposes and Rs 24 crs for Issue Expenses 

Two years ago on January 29,2007, ICICI Group promoted,Firstsource Solutions, came out with it’s IPO at Rs 64 ( Face Value of Rs 10 + Premium of Rs 54).IPO Size was Rs 443.50 crs with a fresh issue of 60 million shares and an offer for sale of 9.3 million shares by Promoter, ICICI Group 

The issue received an overwhelming response and was oversubscribed 40 times….with the QIB Portion @ 71 times,Retail portion @ 11 times and Non Institutional category @ 40 times

It was listed at Rs 90 on February 22,2007 and reached a high of Rs 93 on May 15,2007…Since then it has drifted lower and lower….As of December 31,2008,It’s Shareholder Pedigree boasts the likes of ICICI Bank Promoter group ( 26.74% stake) and Aranda of the Temasek Group,Metavante,WestBridge,Galleon Group,Seacrest ( collectively holding 55.33%)

What has hit this pure play BPO Outfit ?……It’s simply the FCCB Exposure of US $ 275 Million and the effect of the Rupee Depreciation on it that is causing the sickness

The company has adopted AS 30 in FY 09 from July 1,2008 much before it becomes mandatory in FY 2012.It has designated the FCCB as a Hedging Instrument for it’s Net Investments in Non-Integral Foreign Operations.This requires it to debit any translation loss on the FCCB in event of the Rupee Depreciating to  a specially denominated Transalation Reserve and not through the Profit and Loss A/c…However the difference between the Fair Value of the Debt and the carried Value should be written off in the P & L A/c.Also any premium or discount on Forward contracts on hedged positions should be routed through the P & L A/c .Premiums to be paid on redemption have to be amortised over the life of the bond against the Share Premium Reserve 

The Financial Structure of Equity and Debt begs Inquiry.Equity at Rs 428 crs is too high to service…this company has not paid dividend right since incorporation in 2001 as ICICI Infotech Upstream Ltd and later ICICI OneSource Ltd before being rechristened yet again to it’s current name.The Exposure Quantum of US $ 275 Million to FCCB clearly was too risky…a risk which is playing out nightmares now with a weak rupee

It is astonishing that such a situation should arise given the financial acumen and experience of Promoters and Foreign Investors…reflected in the Board of Directors too !

In FY 09,in the first quarter ended June 30,2008,the company wrote of Rs 80 crs through the P & L but in Q 2 ended September 2008,as it adopted AS 30,it created a Rs 108 crs Reserve Debit for the fx translation of FCCB outstandings.It had a hedged position of US $ 145 million at around Rs 42/43 while Dollar zoomed to Rs 47…It’s now Rs 49 so expect some more debit in Q 3,results of which are round the corner

These  Fx related debits have wiped out Reserves substantially….Standalone results at September 30,2008 showed an equity of Rs  428.19 crs and Reserves at Rs 202 crs (consolidated is Rs 312 crs)…The IPO had added Rs 300 crs to the reserves( 60 million shares * Rs 54 Premium less Issue Expenses of Rs 24 crs) which have got depleted on the books by the Fx Translation Loss Entry 

For the half year ended September 30,2008,the PAT,before Fx adjustments ,was Rs 56 crs..It converted to a Loss of Rs 22 crs after the adjustment…Last year in 2007/8,the company notched a Profit of Rs 150 crs,before Fx adjustment and 130 crs after adjustment

The Company is struggling to earn Rs 100 crs this year,before Fx Adjustments…an EPS of Rs 2 and a Multiple of 5 gives Rs 10…Even the Standalone Book Value is below Rs 15

Pre IPO the Networth was Rs 654 crs of which Goodwill on consolidation was a whopping Rs 542 crs…Between 2003 and 2006,several acquisitions were made where the considerations paid were higher than the Book Value of the Companies that were acquired.Book Value was Rs 18.35/share

Post IPO the Networth crossed Rs 1000 crs and Rs 24/share…only to now drop below Rs 15

The company is facing collection and declining business pressure in the BFSI Segment,while business is stable in the Telecom & Media and Healthcare Segments

Allottees,who yet hold the share are stuck with the holding cost of Rs 64. Galleon ‘s cost for 20.8  million shares  is Rs 62,while Aranda (Temasek) averaged Rs 22.46 for it’s 91.92 million shares,Metavante averaged Rs 35.12 for it’s 85.77 Million Shares and WestBridge(Sequoia) averaged an initial Rs 20.90 for it’s 38.98 million shares…All continue to hold the shares,except that WestBridge sold off half it’s holdings to probably make the other half free

It is rather amusing that we are making a call on this stock on our view of Rupee Movement against the Dollar and the Pound and less on the Business potential and prospects

If the Dollar surges yet towards Rs 60 in 2009,then it will be RIP for Firstsource Solutions ! But if the Dollar again recedes to Rs 42,then the Share Price of Firstsource Solutions will move up smartly to Rs 25+

The risk is magnified if the Rupee weakens even by 5% this year against the dollar

Don’t sell off Firstsource Solutions…In fact looking at the Pedigree, and despite weakening fundamentals,this falling share price may present an opportunity to Buy…however do not be in any hurry to average or initiate buying…macros and micros continue to look bleak.

Q3 results are around the corner and they may be worse than Q2…let’s await them as also how the Board and Management intends to tackle this FCCB Menace and what sort of revenue and profit guidance it gives…These 6.75% Bonds are to be redeemed in 2012.Option to convert at Rs 92.30 is unlikely to be exercised…Company does not have enough liquidity comfort to consider buying back these FCCBs at discounted rates

I’m going to keep Firstsource Solutions on my Radar