How Market Structure affects Firm Size

These are important links for economics readings for market size

http://www.business-standard.com/india/news/big-pharma-companies-join-outsourcing-queue/367178/

http://blog.nasscom.in/emerge/2009/08/small-is-big-re-inventing-business-models-which-will-work-for-india/

http://tutor2u.net/economics/presentations/aseconomics/marketfailure/CompetitionandMonopoly/default.html

What is FCCB

Foreign Currency Convertible Bonds (FCCBs)
The name says almost everything about the instrument. FCCBs were unveiled in the Indian markets in 1993 to bring much-needed funds to capital-starved Indian shores. FCCBs are bonds issued by an Indian company, and are subscribed by non-residents by making payments in foreign currency. The bond is issued at a discounted price and carries a promise that the instrument would either be converted into the company’s equity at a pre-determined price at any time till maturity or the principal along with the premium would be returned in foreign currency at the pre-determined future date.

Why FCCBs?
Companies preferred FCCBs as they bring debt at lower interest rate since they had the option to convert into equity. And the company gains higher leverage on conversion as debt is reduced and equity is increased. Also, owners stake in the company doesn’t get diluted when FCCBs are turned to equity, as they do not carry holding rights making it all the more attractive for promoters. At the same time it is less strict compared to a syndicated loan or a debenture, hence more convenient to raise funds for mergers & acquisitions especially.

In the face of such advantages companies did not pay too much attention to the negatives.

Hitch in FCCBs
In falling market conditions, investors do not invest in this instrument. Currency fluctuations also affect sentiments since companies will have to pay more when a currency depreciates whereas, if the currency appreciated, the company will have to pay less. India Inc was blind to the possibility of a strong dollar and that the Indian share markets would fall.

Current Crisis
From 2004 to 2007, FCCBs became a fad for raising money to fuel expansion and buyouts by companies. Once the international markets crashed in 2008, FCCBs went out of fashion because of the instrument’s drawback. The problem was that in such a tight credit situation how will companies meet redemption demands, with many FCCBs maturing as early as 2011-2012.

The light at the end of this dark tunnel became visible only after March 2009, when the markets recovered in a remarkable manner. And when the stock market went through the roof on May 18, 2009, it was assumed that this would help companies deal with the FCCBs’ problem as all the companies could comfortably cross the conversion mark in terms of stock prices.

But, so far, the results have been mixed, at best.

Cases like those of Bharti Airtel, which had issued $15 million worth of FCCBs in 2004 upon a conversion price of Rs 233.17, reached the comfort stage. It had foresightedly inserted a clause that this conversion would take place at a fixed rate of exchange of Rs 43.56 per $1; in fact, the company successfully converted FCCBs to equity before the end of maturity (April 2009).

Then the story got twisted, to a small extent, for Ashok Leyland. It had issued FCCBs in 2004 worth $100 million. This was done under a provison that allowed the allotment of 1,422.581 shares for every $1,000 invested, at the rate of Rs 31 per share. After paying dividends in 2007 the company had reset its price to Rs 30 per share. In its annual report for 2007-08 it reported that by March 2008, 99 per cent of its FCCBs were converted to equity. In March 2008 the price peaked at Rs 43 per share, but bottomed out at Rs 12.99 on December 12, 2008. It has recovered most lost ground with the average trading price in the first two weeks of June 2009 jumping up to Rs 30.22. The company in its quarterly results declaration announced that the remaining FCCBs, worth $1 million, too had been redeemed, which matured in April 2009. This loss, though minimal, would be shown in the June quarter.

The problem acquired gigantic proportions for Suzlon though, mainly due to its acquisitive nature. To solve this Suzlon tried to restructure its $500 million FCCBs, but this was rejected by investors. It had issued the zero-coupon bonds, worth $300 million and $200 million respectively, maturing in October 2012, to part finance the acquisition of REpower. Initially holders of one of tranche of the five-year bonds issued in June 2007 agreed to the company's restructuring of debt plans, but investors in bonds issued in October 2007 did not approve the proposal making the company vulnerable to huge losses. But eventually it has managed to restructure the FCCBs, reducing the liability to $389 million. Now how it uses this position of low debt remains to be seen.

The company that was really buffeted by the FCCBs was Ranbaxy. One of the premier pharmaceutical companies in India, it was taken over by Daiichi Sankyo, while the stock markets were on a high. The company had issued FCCBs worth $440 million 2006 at the conversion price of Rs 716.32 with a fixed rate of exchange of Rs 44.15 per $1. The last time the stock was above this conversion price was on July 22, 2005. Since then the stock has never traded around that price tag. Its next peak was on June 13, 2008, when the stock had touched Rs 568.90. In its quarterly results for March 2009 the company’s loss was high due to mark-to-market provisions that were made for the FCCB, it stood at Rs 224.25 crore.

However, there are some success stories too. Among companies that saw successful conversions in the last month, fall under the mid- and small-cap categories.

Among them are Gujarat NRE Coke, which had announced on June 11, 2009 that it has allotted 5,00,224 equity shares at a price of Rs 44.64 per share pursuant to notices received from FCCB holders for conversion of bonds worth $5,00,000. The company had issued FCCBs in two tranches — 2005 and 2006 of $55 million and $60 million.

Here is a list of companies that may yet face FCCB music as their redemption dates are fast approaching. It remains to be seen whether these companies will have to cough up money for bond holders or whether they successfully manage to turn FCCBs into equity.

What is a QIP

What is QIP?

Qualified institutional placement (QIP) is a capital raising tool, whereby a listed company can issue equity
shares, fully and partly convertible debentures, or any securities other than warrants, which are convertible into equity shares, to a qualified institutional buyer (QIB). Apart from preferential allotment, this is the only other speedy method of private placement for companies to raise money. It scores over other methods, as it does not involve many of the common procedural requirements, such as the submission of pre-issue filings to the market regulator.

Why was QIP introduced?

To enable listed companies raise money from domestic markets in a short span of time, market regulator Sebi introduced the concept of QIP in 2006. This was also done to prevent listed companies in India from developing an excessive dependence on foreign capital. Prior to introduction of QIPs, the complications associated with raising capital in the domestic markets had led many companies to look at tapping overseas markets via foreign currency convertible bonds (FCCB) and global depository receipts (GDR). This has also helped issuing companies price their issues closer to the prevailing market price.

Who can participate in the issue?

The specified securities can be issued only to QIBs, who shall not be promoters or related to promoters of the issuer. The issue is managed by a Sebi-registered merchant banker. There is no pre-issue filing of the placement document with Sebi. The placement document is placed on the websites of the stock exchanges and the issuer, with appropriate disclaimer to the effect that the placement is meant only for QIBs on private placement basis and is not an offer to the public.

Why there is a sudden rush for QIPs?

Several companies, especially real estate, were starved of money in the recent slowdown and were finding it difficult to stay afloat. The revival in market sentiment came as a boon to these companies, which are rushing to raise money, mainly to retire expensive debt and restructure their balance sheets. In over a month, funds raised through QIPs by companies has already exceeded the total amount of roughly Rs 3,500 crore that was raised in 2008. A large number of such issues are expected to hit the market in the next few weeks.

Understanding Technical Trends in Stocks

Technically, previous support if breached becomes resistance for the market. It’s not a thumb rule that strike with maximum put built-up becomes support and strike with maximum call built-up becomes resistance.

Interestingly, despite Nifty futures correcting from 4424 to 3965 in six trading sessions, implied volatility decreased from 45% to 35% and Put-Call-Ratio correcting from 0.99 to 0.80.

This indicates that there was selling of options and mainly call options and hence above support and resistance come into play.

One should remember that implied volatility is function of premium of options and premium of option is function of what participants opt to do.

As they opted to sell the options, prices came down and so did implied volatility.

How to Withdraw from SIP Investments

Case Study:
I invested in IDFC India Blueship Fund at different levels. Now that the NAV has risen, I plan to book some profits and rebalance my portfolio. But I can't figure out which of the units will be redeemed. Will it be earlier investments or the later ones? How will I figure out the value of my investments after partial redemption?

Your query reveals that booking profits is not an easy exercise at times. From the investment details you have supplied, you own a total of 3,763 units of Franklin India Bluechip Fund. We gather that you wish to redeem profits of Rs 1,23,135 from the current valuation of Rs 1,63,635.

As a first step, you can redeem units by filling in a redemption request for the sum of Rs 1,23,135 and the fund would deduct the necessary number of units. But as an informed investor it is always good to be in command of one's investments. So here goes.

Investments and redemptions in mutual funds follow a principle called first-in first-out (FIFO). This means that the investments made first will be the first to be redeemed and so on. In order to book profits of Rs 1,23,135, you will have to redeem a certain number of units. At an NAV of Rs 43.48 per unit, you will have to redeem 2,832 units. On the basis of the FIFO principle, the first batch of units to be redeemed will be those purchased first and then the next batch and so forth and so on. Hence units purchased on February 8 (412.201), September 12 (90.09), September 19 (465.983) and October 1 (717.017) will be the first to go. The only purchase that will be partially diluted is the 1,150 units purchased on October 4, 2002. Of this you will end up retaining only 3.82 units.

As for the status of your remaining investments, the balance units will be maintained with the fund house until you wish to redeem them. And these units will be the most recently purchased ones totaling 931.46 units i.e. 3.82 units from October 4 and 927.644 from the purchase made on October 18.

Some Export Import Absolute Figures for India June 2009

India's exports declined by 29.2% in May -- contracting for the eighth month in a row -- over the same month last year as overseas
shipments hit by the slowdown in major global markets like the US and Europe.

Exports dropped to USD 11.01 billion in May from USD 15.55 billion in the same month last year, according to the government data released today.

Imports, too, dipped for the fifth straight month by 39.2% to USD 16.21 billion in May over the year-ago month.

Trade deficit was USD 5.20 billion in May against USD 11.13 billion in May 2008.

Exports plunged by 33.2% to USD 10.74 billion in April from USD 16.08 billion in year ago period.

The exports during April-May period dipped by 31.2% to USD 21.75 billion from USD 31.62 billion in the same period last year.

Overseas shipments grew by a meager 3.4% to USD 168.7 billion in 2008-09 after hit by the global slowdown in the second half of the previous fiscal.

How to valuate your comapny

There was a good article on how to valuate your company that I read today. Hence before it vanishes from the web, I thought of keeping it with me forever.

The Mystery of Valuation

I get asked often either directly or indirectly "what is my company worth"? Usually it comes in the form of "I want to get $X investment. I don't want to give away more than Y%. How does it all work"? Well, it all comes down to valuation.

There's plenty of ways to back into the value of a company. Which one is right? Depends on who you ask. Each investor will have their favorite methodology. Entrepreneurs sometimes have their own favorite as well. Your goal as an entrepreneur is to present a fair, unbiased value. Why not aim for the highest value? Sure it'll boost your ego, but ultimately you'll be the only one who touts the figure, and no one else will go along with it. Instead, give a fair & accurate figure, and you'll add to your credibility, and save time justifying your inflated overvalued amount.

So what is fair? Out of all the valuations I've seen, the best way is to do several, then average them. If you can show investors that you've done your homework and shown all the angles, it's easy to reason why a weighted average is the best representation of your company.

I've used 4 methods lately.

1. Current Assets & Investment (10% weight)
2. 5 Years Projected Net Income (25% weight)
3. 5 Years Projected Sales Discounted 10X (25% weight)
4. Present Value of 5 Years Projected Cash Flows (40% weight)

Calculating the valuation based on each of the 4 metrics above, and then averaging based on the weight, you bring the high and low to a mid ground, and can justify your number as both reasonable, and possibly conservative. Being based on 5 years projections, you would need to have a financial forecast model in place, with reasonable assumptions & growth rates.

Example:

Company ABC

1. Current Assets & owner investment: $500,000

2. 5 Years Projected Net Income: $7.2M

3. 5 Years Projected Sales Discounted 10X: $8.2M

4. Present value of 5 Years Projected Cash Flows: $6.4M

If you chose just 1 valuation method, most likely you'd choose 5 Years Sales, discounted 10 fold. You could even argue that you discounted at a high multiple, so it's conservative. Yet looking at other methods, that is the highest valuation of them.

Weighting the amounts at 10/25/25/40 and doing a little math, the weighted average valuation is $6.46M. Drastically different than the stand alone $8.2M.

A note on #1. Current Assets & Investment. Why include it? It'll obviously be far less than the others. While not a fair representation of the potential of your company, it adds in a base level, current figure, and it is lightly weighted. It's all part of being conservative.

Now that you have a valuation of $X, it becomes much easier to put a value on Y%. Depending on existing investments and shares granted, a Capitalization Table can break down how everyone's investment & share holdings relate. Best of all, you've put a solid number down in writing of what your vision is worth, and can feel confident in justifying it to friends, investors and yourself.

Source: http://www.roguecfo.com/blog072808.html