Mopping it up, hand over fist

Indian Inc rushing abroad to get money at dirt-cheap rates

Indian firms are reported to have raised nearly $2.25 billion by way of external borrowings in 2003, which is the highest for any year. One form of borrowing that has recently found favour recently are FCCBs or foreign currency convertible bonds.

For instance, Indian Hotels went into the market to raise $150 million and received a response of $2.5 billion, an oversubscription of over 16 times.

Now, a number Indian corporates including Zee Telefilms, Bharti Tele-Ventures, Elder Pharmaceuticals, have lined up plans to raise funds through this route.

FCCBs are generally issued to investors at a spread over a global benchmark such as Libor and are convertible into the company's equity shares at the option of the investor.

The reason global investors have been lapping up FCCBs issued by India corporates is simple: while these instruments offer the safety of a debt instrument, the option of converting them into shares at a later date allows them to participate in the Indian growth story, which is increasingly becoming a preferred investment destination for global investors.

FCCBs allows these investors to invest in the Indian growth story for a 3-5 year perspective, without having to take the risk of making an equity investment.

In return, Indian corporates get to borrow at dirt-cheap rates - the Indian Hotels issue went through with a coupon of 3.15 per cent. With such low rates for financing, many corporates may borrow just to repay existing loans which obviously cost more.

Needless to say, this will have a positive impact on companies' bottomlines. The only risk is of the issue size being too huge, and if conversion leads to a significant dilution in the equity base of the company.

Another issue relating to FCCBs is that they are included while calculating foreign holding for sectoral caps. Corporates who have already reached the upper will not be able to use this route for financing, as a result.

Norms on external borrowings were relaxed earlier this year, when all issues up to $500 million was brought under the automatic route. This has also played an important part in the sudden increase in FCCB issues.

Ranbaxy Labs

Ranbaxy has launched RiometTM (Metformin HC1oral solution), an anti-diabetes drug, in America. In addition, it has also received aprovals from the US FDA for its Benazepril Hydrochloride tablets, a cardio-vascular medication.

With an increasing number of Americans suffering from cardiac and type 2 diabetes, the company has been keen to expand its product portfolio in these segments in order to boost exports.

The markets did not pay much attention to these developments, and the Ranbaxy scrip closed marginally lower on the BSE at Rs 981.85. The stock has fallen almost 15 per cent in the past one month. According to analysts, it will be a while before the benefits from these new additions accrue to the bottomline.

Ranbaxy's RiometTM introduction has grabbed the attention of analysts, due to the product's inherent technical strengths.

A growing number of Americans, especially senior citizens, are unable to swallow diabetes tablets due to a condition called Dysphagia. And as Ranbaxy's product is the only liquid form of Metformin available in the American market, it provides the company with a number of advantages.

Sales of diabetes medication is estimated at $25 billion each year in USA. But analysts point out that apart from gaining a first mover advantage, the new diabetes treatment would help the company enhance its brand recall amongst doctors and pharmacies, an attribute crucial to growing market share in the fiercely competitive American pharmaceutical industry.

In the case of its cardio-vascular medication, the US FDA approval improves the company's product pipeline. Analysts, however, caution that the company would now need to launch the product as soon as possible, as other generic firms have also received approval.

In the generics market, as the number of firms that provide similar medication grows, profit margins drop very rapidly. It's the first mover that reaps the maximum benefit. Ranbaxy's exports in the calendar year 2003 amounted to Rs 2,487 crore or 71 per cent of total sales.

Analysts are optimistic that Ranbaxy's latest move should help to reverse the 52 per cent decline in profits reported in the quarter ended December 2003, although, as pointed out earlier, it will be a while before benefits accrue.

With contributions from Mobis Philipose and Amriteshwar Mathur