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ANALYSIS BEYOND CONSENSUS

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FCCB - Real debt; optional equity Vishal Goyal (vishal.goyal@edelcap.com)
April 23, 2008

+91-22-2286 4370

Higher reported profits; as interest costs skirt P&L account Foreign currency convertible bonds (FCCBs) are often structured to allow the borrower to pay the entire interest and principal on the maturity of the instrument in the form of a redemption premium. This makes these instruments akin to zero coupon bonds, and thus, the accounting treatment of redemption premium becomes critical. There is ambiguity regarding accounting policies to be followed by companies on FCCBs in the absence of well-defined accounting standards. Currently, most companies either reduce redemption premium from their net worth (share premium reserves) or treat it as a contingent liability. Thus, companies' P&L accounts do not reflect the actual cost of FCCBs and reported financials will lead one to erroneously conclude that companies have higher profitability and a lower cost of debt. This issue is particularly relevant for companies whose current share price is significantly below their conversion price. New accounting norms to adversely impact reported profitability We have analysed the impact of the new accounting standard (AS 30 and AS 31) on 37 companies (BSE-200); as per our calculations, reported average earnings (adjusted for this interest cost) will be lower by 0-34% and RONW lower 08% (points). In case of some companies, the effective conversion price is substantially higher than the current market price; the current market price has to go up 100-410% to reach its effective conversion price. Split accounting (under AS 30 and AS 31) seems more logical Split accounting prescribes the FCCB proceeds to be disclosed in two parts - liability (debt) component and equity component. Out of the total proceeds, present value of amount payable at maturity will be disclosed as liability components, and the balancing figure would be equity component. The redemption premium will be calculated on the liability portion and treated as an expense, and will be amortised over the life of the FCCB on a yield to maturity (YTM) basis. The new accounting standard will reflect the true cost of FCCBs and will also eliminate inconsistencies in accounting treatment adopted for FCCBs by various companies. Accounting Standard (AS) 30 and 31 (Financial Instruments: Recognisition and Measurement, and Presentation) issued by The Institute of Chartered Accountants of India (ICAI) are recommendatory from April 1, 2009, and mandatory from April 1, 2011.

Edelweiss Securities Limited

Analysis Beyond Consensus

Higher reported profits as interest costs skirt P&L account


Most companies have used Accounting Standard (AS) 29 on provisions and contingent liabilities, read in conjunction with Section 78 of the Companies Act, 1956, to arrive at an approach to account for redemption premium. Existing policy
Companies have not charged interest on FCCB to P&L account due to ambiguity in accounting for redemption premium.

On issue of FCCBs/FCCNs, companies first recognise the amount of total proceeds as liability under unsecured loans.

Transaction cost, directly attributable to the issue of bonds/notes, is charged to the security premium account (i.e., net worth) as defined in Section 78 of the Companies Act, 1956.

Premium payable on the redemption of bonds (i.e., the gradual appreciation in the value of bonds payable on maturity) is treated differently by companies, as follows: A. Some companies charge it proportionately over the maturity period of the bond to securities premium account in the absence of any specific guideline and accounting standard. B. A few companies charge redemption premium fully in the securities premium account in the year of issue. C . Most companies give no treatment for redemption premium and recognise bonds as contingent liability, based on the assumption that bonds will finally be converted into equity shares, so there is no need to account for redemption premium in financial statements. D. Very few companies charge redemption premium over the maturity period of the bond to P&L account.
(Note: For company-wise details refer table 8)

New accounting norms to adversely impact reported profitability


Adjusted PAT calculated by us was lower than the companies reported PAT (average) by 0-34%.

The new accounting standards will significantly impact the financial statement of entities: From a P&L perspective, it will reduce the net profit. From a balance sheet perspective, this will change gearing and debt-equity ratios. Change in debt-equity situation will have a significant impact on the income statement and will affect debt-equity ratio, interest-coverage ratio, debt-service ratio, and EPS. Amongst BSE-200, there are around 37 companies where FCCB is outstanding till 200607. We have calculated the impact of the new accounting standard on these companies and the adjusted PAT calculated by us was lower than the companies' reported PAT (average) by 0-34%. RONW was lower 0-8% (points) for these companies.

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Foreign currency convertible bonds/notes

Chart 1: Impact on adjusted PAT and adjusted RONW for 2006-07


40 PAT (LHS) 30
(%)

10 RONW (RHS) 8
(%) Reliance Comm
3

20

10

Aban Offshore

Jain Irrigation

Educomp Solutions Bharat Forge Financial Technologies Welspun Gujarat IVRCL Infrastrucutre

Hind Construction Bajaj Hindustan Aurbindo Pharma Glenmark Pharma

Punj Lloyd

Ranbaxy Laboratories

Source: Company, Edelweiss research

We have also analysed the movement of market price in relation to effective conversion price (conversion price + redemption premium) (refer table 5). During our analysis, we noticed that in some companies current market price is significantly lower than the effective conversion price, and the current market price has to go up 100-410% to reach its effective conversion price. The chart below lists the 18 companies whose market capitalisation is more than USD 300 mn and bonds are maturing till 2011.

Chart 2: Percentage increase required in current market price to reach effective conversion price
400 320
(%)

240 160 80
Lupin Bajaj Hindustan Videocon Ranbaxy India Cements Amtek Auto Hotel Leela Wockhardt Bharat Forge Panacea Biotec Bilcare Jaiprakash Asso Hind Construction Bharti Shipyard

Aurobindo Pharma

Source: Company, Edelweiss research

Edelweiss Securities Limited

Electrosteel Cast

Financial Tech

Maharashtra Seamless

Amtek Auto

Analysis Beyond Consensus

Split accounting seems more logical


The ICAI has acknowledged the problem and issued the following standards: Accounting Standard 30 (Financial Instruments: Recognition and Measurement). Accounting Standard 31 (Financial Instruments: Presentation). Exposure draft on proposed Accounting Standard 32 (Financial Instruments: Disclosures).
New accounting standards suggest separation of liability and equity components of FCCB.

These accounting standards come into effect with respect to accounting periods commencing on or after April 1, 2009. They will be recommendatory in nature for an initial period of two years and mandatory with respect to accounting periods commencing on or after April 1, 2011, for all commercial, industrial, and business entities, except for small and medium-sized entities. Initial recognition Para 58-67 of AS 31 deals with compound financial instruments. According to it, a compound financial instrument like FCCB requires the issuer to show the liability component and equity component separately on the balance sheet (split accounting). The liability component is measured on the basis of the present value of future cash flows discounted at the rate of interest applied at that time by the market to instruments of comparable credit status and providing substantially the same cash flows, on the same terms, but without the conversion option. The difference between the proceeds of bonds issue and the fair value of liability is assigned to the equity component.

Redemption premium should be amortised through P&L account on YTM basis.

Redemption premium Redemption premium will be calculated on the liability portion and treated as an expense. It will be amortised over the life of the FCCB on YTM basis. Transaction costs Transaction costs (e.g. issue expenses) are allocated to the liability and equity components in proportion to the allocation of total proceeds of bonds; the portion allocated to liability component will be amortised over the life of the FCCB on YTM basis. Early redemption/repurchase On early redemption/repurchase of bonds, the entity allocates the consideration paid and transaction costs to the liability and equity components in the method consistent with that used in the original allocation to separate the components of the proceeds received by the entity when bonds were issued. The gains or losses related to the liability component are recognised in the P&L account and those related to the equity component are adjusted in equity against the original equity component; the balance, if any, is adjusted against reserves and surplus.

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Foreign currency convertible bonds/notes

Early conversion An entity may amend the terms of a convertible instrument to induce early conversion, for example, by offering a more favourable conversion ratio or paying other additional consideration. The difference (on the date the terms are amended) between the fair value of the consideration the holder receives on conversion of the instrument under the revised terms and the fair value of the consideration the holder would have received under original terms is recognised as a loss in the statement of P&L. Conversion at maturity On conversion of the bonds at maturity, the entity derecognises the liability component and recognises it as equity. The original equity component remains as equity (although it may be transferred from one-line item within equity to another). There is no gain or loss on conversion at maturity. Example 1: Accounting for compound financial instruments An entity issues 2,000 zero coupon FCCB worth INR 2,000,000 on April 1, 2004. The bonds have a three-year term i.e., maturity on March 31, 2007, and are issued with a face value of INR 1,000, giving total proceeds of INR 2 mn. Each bond is convertible at any time up to maturity into 250 equity shares. If not redeemed or converted before maturity, they will be redeemed at 115% of the principal amount on maturity. When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9%. Liability on account of redemption premium, assuming that bonds are not converted, will be INR 0.3 mn. Table 1: Accounting treatment under various methods Redemption premium charged on straight line basis over the life of bond Year 1 Receipt of proceeds Cash & Bank Loans Equity Profit & Loss A/c Securities premium Liabilities Increase Increase Increase Decrease Decrease Increase 2,000 2,000 100 100 (INR 000) Redemption New premium No accounting charged treatment standard fully in the of (for detail year of redemption see working issue of bond premium note 1) 2,000 2,000 300 300 2,000 2,000 2,000 1,776 224 95 95

Redemption premium

Year 2 Redemption premium

Profit & Loss A/c Securities premium Liabilities

Decrease Decrease Increase

100 100

100 100

Year 3 Redemption premium

Profit & Loss A/c Securities premium Liabilities

Decrease Decrease Increase

100 100

105 105

Source: Edelweiss research

Edelweiss Securities Limited

Analysis Beyond Consensus

Working note 1 Table 2: Split accounting INR Present value of the principal INR 2,000,000 repayable at the end of three years Present value of the redemption premium INR 300,000 payable on maturity Total liability component Equity component (balancing figure) Proceeds of the bond issue 1,544,367 231,655 1,776,022 223,978 2,000,000
Source: Edelweiss research

The redemption premium will be amortised over the term of FCCB on YTM basis. The YTM for the given example works out to 5.34%. The spread of redemption premium over the period of three years is give below: Table 3: Calculation of interest and liability portion Year 2004-05 2005-06 2006-07 Opening balance (Liability portion) 1,776,022 1,870,867 1,970,777 Total interest cost 94,845 99,910 105,245 300,000 Interest (INR) Closing balance (Liability portion) 1,870,867 1,970,777 2,076,022
Source: Edelweiss research

At the end of term, the closing balance of liability portion is INR 2,076,022 and the balance in equity potion is INR 223,978. The aggregate of the above two comes to INR 2,300,000, the amount to be redeemed including principal and redemption premium on maturity of FCCB. Example 2: Accounting in case of conversion of FCCB In case of example 1 above, assume that at the end of year two 1,500 bonds got converted into equity shares as per the terms of instrument, resulting in allotment of 375,000 shares with a face value of INR 1 each were redeemed on maturity date. and remaining 500 outstanding bonds

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Foreign currency convertible bonds/notes Table 4: Accounting treatment under various methods Redemption premium charged on straight line basis over the life of bond Year 1 Accounting in year 1 will be same as done in example 1 above Liabilities Equity portion on FCCB Share capital Share premium Year 3 Redemption premium on redemption of bonds Increase Increase 375 1,275 375 1,350 375 1,125 375 1,271 Decrease Decrease 1,650 1,725 1,500 1,478 168 (INR 000) Redemption New premium No accounting charged treatment standard fully in the of (for detail year of redemption see working issue of bond premium note 2)

Year 2 On conversion of 1,500 bonds

P&L A/c Securities premium Liabilities

Decrease Decrease Increase

25 25

75 75

26 26

On redemption of outstanding 500 bonds

Liabilities Bank

Decrease Decrease

575 575

575 575

575 575

575 575

Source: Edelweiss research

Working note 2 Table 5: Split accounting Split accounting Value of bonds at the end of Year 2 Value attributable to bonds converted Value of bonds outstanding Add: Interest for year 3 Value of bonds to be redeemed Liability 1,970,777 1,478,083 492,694 26,311 519,006 Equity 223,978 167,983 55,994 55,994 (INR) Total 2,194,755 1,646,066 548,689 26,311 575,000

Source: Edelweiss research

Table 6: Calculation of interest & liability portion Year Opening balance (liability portion) 2004-05 1,776,022 2005-06 1,870,867 2006-07 492,694 Total interest cost

Interest 94,845 99,910 26,311 221,066

Conversion of bonds 1,478,083 -

(INR) Closing balance (liability portion) 1,870,867 492,694 519,006


Source: Edelweiss research

Edelweiss Securities Limited

Analysis Beyond Consensus

Annotations on FCCB in India


FCCBs/FCCNs offer distinct advantage to Indian companies FCCBs/FCCNs are debt instruments issued in a currency different than the issuer's
FCCB are quasi-debt instruments to raise foreign currency funds at attractive rates with an option to convert the same into equity.

domestic currency with an option to convert them in common stocks of the issuer company. They are quasi-debt instruments that help companies raise foreign currency funds at attractive rates. FCCBs are similar to bonds, as they make regular coupon (interest) payments and also give the bond holder an option to convert the bond into stock. The pricing of FCCB is generally at a 25-50% premium over the prevailing market price, giving sufficient cushion to the issuer. The FCCB holder opts to convert it in case the market price exceeds the exercise price or if there is an intention to make a strategic investment by the lender irrespective of the stock price in the market. In many cases, the FCCB issuer may also look forward for conversion so that there is no outflow of funds on redemption. Instead, the issuers' reserves are increased by reversal of premium. The interest component or coupon on FCCBs is generally 30-40% less than on normal debt paper or foreign currency loans. This translates in to cost savings of ~2-3%. The YTM in case of FCCBs is normally 2-7%.

FCCB is widely acknowledged due to its advantages to both issuer and investors.

In the past few years, there has been a flood of FCCB/FCCN issues from Indian companies, as they have become increasingly popular among investors, given the unique advantages that FCCBs offer, both to issuers (raising equity at a premium to the current market price) and investors (potential equity upside with a limited downside), especially in a buoyant equity market. The cost of borrowing through FCCB/FCCN is much lower than from the Indian market by way of issue of debentures and loan from banks/ financial institutions.

Chart 3: FCCB/FCCN issue trend in the past three years


7,000 68 63 6,000 49 5,985 50 4,482 60 70

5,000

4,000

40

3,000 2,843 2,000 No. of issues 1,000 2005 2006 2007 Total proceeds

30

20

10
Source: RBI

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(No. of issues)

(USD / mn)

Foreign currency convertible bonds/notes

Ambiguity in accounting treatment of FCCB FCCBs typically have tenure ranging between 5 and 8 years and they can be converted into equity by investors after a certain date (or if the company's share price crosses a certain level over the conversion price). FCCBs are often structured to allow the borrower to pay the entire interest and principal on the instrument on maturity in the form of a redemption premium. This makes these instruments akin to zero coupon bonds, and hence, the accounting treatment of redemption premium becomes critical. There is ambiguity regarding accounting policies followed by various companies in the absence of well-defined accounting standards. Comparison with global standards The two most widely-accepted accounting standards are International Financial Reporting Standards (IFRS) and the US Generally Accepted Accounting Practices (US GAAP). Under both standards, proportionate redemption premium is charged through the P&L account. The ICAI proposal, when implemented, will result in Indian companies' accounting closer to global best practices.

Table 7: Impact of new accounting standard on profitability of companies (BSE-200) a) Companies where less than 50% of FCCB are converted till February 2008 S No Company 2006-07 2005-06 Reported Adj. PAT PAT PAT RONW PAT RONW (INR mn) 1 Aban Offshore (140) (192) -37.3% -0.5% 2 Adani 1,774 1,754 -1.1% -1.7% -2.9% -0.9% 3 Bajaj Hind. (Sep. ending) (94) (344) -266.5% -1.7% -9.0% -1.9% 4 Bharat Forge 2,906 2,607 -10.3% -2.4% -7.4% -2.2% 5 Educomp Solutions 287 258 -9.9% -3.6% 6 Financial Technologies 714 631 -11.6% -3.0% 7 Glenmark Pharma 3,101 2,909 -6.2% -8.3% -15.5% -5.9% 8 India Cements 4,785 4,635 -3.1% -0.8% 9 Jain Irrigation 836 712 -14.9% -4.0% 0.0% -1.8% 10 Jindal Saw 13,350 13,239 -0.8% -1.4% -0.4% -1.3% 11 Jindal Stainless 3,371 3,307 -1.9% -0.7% -4.2% -1.0% 12 Larsen & Tourbo 22,401 22,370 -0.1% -0.7% -0.6% -1.0% 13 Lupin 3,086 2,896 -6.2% -3.5% -2.7% -3.0% 14 Maharashtra Seamless 2,339 2,189 -6.4% -2.6% -6.8% -5.2% 15 Ranbaxy Lab. (Dec. ending) 5,103 4,472 -12.4% -4.5% 16 Reliance Communication 35,310 34,480 -2.3% -1.0% 17 Tata Chemical 5,081 4,895 -3.7% -2.3% -4.1% -2.6% 18 Tata Motors 21,700 21,287 -1.9% -1.0% -2.3% -1.4% 19 Tata Power 7,368 7,166 -2.7% -0.7% -2.7% -0.8% 20 Videocon Ind.(Sep. ending) -0.9% -0.4% 21 Welspun Gujrat 1,425 1,235 -13.4% -2.4% -32.1% -4.1% 2004-05 PAT RONW

-2.1%

-1.0%

-2.6%

-4.2%

-0.9% -0.4%

-1.5% -1.4%

-0.8% -2.7% -3.1% -11.9%

-2.1% -2.3% -1.0% -2.9%

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Analysis Beyond Consensus b) Companies where more than 50% of FCCB are converted till February 2008 S No Company 2006-07 2005-06 Reported Adj. PAT PAT PAT RONW PAT RONW (INR mn) 1 ACC (Dec. ending) 12,396 12,390 0.0% -0.1% -0.3% -0.4% 2 Amtek Auto 4,085 3,550 -13.1% -3.2% -6.4% -2.4% 3 Ashok Leyland 4,413 4,190 -5.0% -0.9% -1.8% -2.1% 4 Aurbindo Pharma 2,010 1,381 -31.3% -7.3% -18.1% -2.1% 5 HDFC 17,420 16,730 -3.9% -3.1% -2.9% -3.3% 6 Hind Construction 329 137 -58.4% -2.2% 7 IVRCL Infrastrucutre 1,631 1,484 -9.0% -1.8% -4.4% -3.5% 8 Jaiprakash Associates 5,533 5,277 -4.6% -1.6% -1.9% -1.5% 9 Mahindra & Mahindra 14,972 14,666 -2.0% -1.8% -0.6% -0.5% 10 Punj Lloyd 1,969 1,792 -9.0% -2.3% 11 Sterlite Industries 44,842 44,842 0.0% -0.2% -0.1% -0.3% 12 Sun Pharmaceutical 7,843 7,415 -5.5% -2.6% -8.7% -7.1% 13 Tata Tele (3,106) (3,220) -3.7% -0.2% -2.2% -1.4% 14 United Spirits 5,670 5,523 -2.6% -0.7% -1.0% -1.0% 15 Wockhardt (dec ending) 2,413 2,230 -7.6% -2.5% -6.7% -4.1% 16 Zee Entertainment 2,375 2,317 -2.4% -0.3% -4.8% -1.0%

2004-05 PAT -0.8% -0.3% RONW -1.4% -2.7%

-1.3% -1.3% -0.7% -1.5% -1.9% -1.3% -2.8%

-1.0% -2.2% -0.4% -7.2% -2.3% -4.3% -0.9%

Source: Company, Edelweiss research Notes: 1. We have used 9% market interest rate for similar debt without conversion option (i.e., effective interest rate used for discounting). 2. We have taken tax rate as 33.33% for the above calculations. 3. Impact has been calculated on consolidated financials

Table 8: List of companies and their accounting policies A. Charging redemption premium proportionately over maturity period of the bond in the security premium account 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Reliance Communications Larsen & Toubro HDFC Ltd Tata Chemicals Ranbaxy Laboratories Maharashtra Seamless Videocon Industries Orchid Chemicals Financial Tech. United Spirits IVRCL Infrastructure Jaiprakash Associates Glenmark Pharma Welspun Gujarat

Net worth of companies has decreased Y-o-Y; cost of debt has not been factored in, resulting in overstatement of profit.

B. Charging redemption premium fully in the securities premium account in the year of issue 15. 16. 17. 18. 19. 20. 21. Mahindra & Mahindra ACC Tata Power Zee Entertainment Enterprises Tata Teleservices Tata Motors Bajaj Hindustan Net worth has drastically decreased in the year of issue, resulting in a substantial increase in debt/equity ratio and overstatement of profit.

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Foreign currency convertible bonds/notes C. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. D No treatment for redemption premium Adani Enterprises Punj Lloyd Wockhardt Sun Pharmaceuticals Ashok Leyland Lupin Bharat Forge Hind. Construction India Cements Aurobindo Pharma Jindal Saw Amtek Auto Sterlite Industries Educomp Solutions Aban Offshore

Cost of debt not factored in, resulting in overstatement of profit.

Redemption premium charged to P&L account

37. Jindal Stainless


Source: Company, Edelweiss research

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Analysis Beyond Consensus Table 9: Details of FCCB for the BSE-200 companies covered in analysis of impact Sr.No. Company Issue date Maturity date Issue size 1 Aban Offshore April, 2006 April, 2011 JPY 11610 mn 2 ACC March, 2004 March, 2009 USD 60 mn 3 Adani Enterprises Oct, 2004 Oct, 2009 USD 38 mn 4 Amtek Auto June, 2005 June, 2010 USD 150 mn 5 Amtek Auto June, 2006 June, 2011 USD 250 mn 6 Ashok Leyland April, 2004 April, 2009 USD 100 mn 7 Aurobindo Pharma Aug, 2005 Aug, 2010 USD 60 mn 8 Aurobindo Pharma May, 2006 May, 2011 USD 150 mn 9 Aurobindo Pharma May, 2006 May, 2011 USD 50 mn 10 Bajaj Hindustan Feb, 2005 Feb, 2010 USD 50 mn 11 Bajaj Hindustan Feb, 2006 Feb, 2011 USD 120 mn 12 Bharat Forge April, 2005 April, 2010 USD 60 mn 13 Bharat Forge April, 2005 April, 2010 USD 60 mn 14 Bharat Forge April, 2006 April, 2012 USD 40 mn 15 Bharat Forge April, 2006 April, 2013 USD 39.9 mn 16 Educomp Solutions Oct, 2006 Oct, 2011 USD 25 mn 17 Educomp Solutions July, 2007 July, 2012 USD 80 mn 18 Financial Tech. Dec., 2006 Dec., 2011 USD 100 mn 19 Glenmark Pharma Feb, 2005 Feb, 2010 USD 20 mn 20 Glenmark Pharma Feb, 2005 Feb, 2010 USD 50 mn 21 Glenmark Pharma Jan, 2006 Jan, 2011 USD 30 mn 22 HDFC Ltd Sept, 2005 Sept., 2010 USD 500 mn 23 Hind. Construction March, 2006 March, 2011 USD 100 mn 24 India Cements May, 2006 May, 2011 USD 75 mn 25 IVRCL Infrastructure Nov, 2005 Nov, 2010 USD 65 mn 26 Jain Irrigation March, 2006 March, 2011 USD 60 mn 27 Jaiprakash Associates Feb, 2005 Feb, 2010 USD 100 mn 28 Jaiprakash Associates March, 2006 March, 2013 Euro 165 mn 29 Jindal Saw July, 2006 July, 2011 JPY 9090 mn 30 Jindal Stainless Dec, 2004 Dec, 2009 USD 60 mn 31 Larsen & Toubro Nov., 2004 Nov., 2009 USD 150 mn 32 Larsen & Toubro Jan., 2006 Jan., 2011 USD 100 mn 33 Lupin Jan, 2006 Jan, 2011 USD 100 mn 34 Maharashtra Seamless July, 2005 July, 2010 USD 75 mn 35 Mahindra & Mahindra May, 2004 May, 2009 USD 100 mn 36 Mahindra & Mahindra April, 2006 March, 2011 USD 200 mn 37 Punj Lloyd April, 2006 April, 2011 USD 125 mn 38 Ranbaxy Laboratories March, 2006 March, 2011 USD 440 mn 39 Reliance Communications March, 2006 March, 2011 USD 500 mn 40 Reliance Communications Feb, 2007 Feb, 2012 USD 1000 mn 41 Sterlite Industries Oct, 2003 Oct, 2008 USD 50 mn 42 Sun Pharmaceuticals Nov, 2004 Nov, 2009 USD 350 mn 43 Tata Chemicals Feb, 2005 Jan, 2010 USD 150 mn 44 Tata Motors July, 2003 July, 2008 USD 100 mn 45 Tata Motors April, 2004 April, 2009 USD 300 mn 46 Tata Power Feb, 2005 Feb, 2010 USD 200 mn 47 Tata Teleservices June, 2004 June, 2009 USD 125 mn 48 United Spirits March, 2006 March, 2011 USD 100 mn 49 Videocon Industries Feb, 2006 March, 2011 USD 90 mn 50 Videocon Industries July, 2006 July, 2011 USD 105 mn 51 Welspun Gujarat 2004-05 2009-10 USD 40 mn 52 Welspun Gujarat 2005-06 2010-11 USD 75 mn 53 Wockhardt Oct, 2004 Oct, 2009 USD 110 mn 54 Zee Entertainment Enterprises April, 2004 April, 2009 USD 100 mn on PAT YTM# Coupon rate 4.02% 2.50% 1.00% 5.32% 1.00% 5.75% 0.00% 6.00% 0.50% 1.00% 0.50% 6.95% 7.90% 8.01% 2.14% 5.94% . 5.32% 0.50% 5.83% 0.50% 6.09% 6.61% 7.63% 1.00% 7.13% 8.03% 5.99% 6.04% 6.92% 4.62% 6.50% 8.11% 7.25% 6.86% 6.15% 0.50% 6.17% 0.50% 4.00% 0.75% 5.83% 0.50% 4.00% 1.25% 0.65% 6.14% 6.30% 3.25% 5.00% 4.71% 4.86% 5.39% 5.39% 4.30% 1.00% 4.65% 4.80% 1.00% 4.10% 1.00% 4.95% 1.00% 3.91% 1.00% 4.54% 1.00% 6.73% 2.00% 3.15% 5.00% 4.25% 1.00% 7.25% 5.32% 3.53% 0.50%

Source: Company, Edelweiss research Note: # reported YTM. However YTM calculated for IRR on implied liability component of FCCB would be different.

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Foreign currency convertible bonds/notes Table 10: List of companies where FCCBs are issued and outstanding till February 2008 S No Company Month of Maturity Issue Effective Current issue Period Size conversion Market price price as on 31.03.08

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

Simbhaoli Sugars Mar, 2006 Vardhman Textiles March, 2006 Aurobindo Pharma May, 2006 3i Infotech July, 2007 Aurobindo Pharma May, 2006 3i Infotech April, 2007 Prithvi Information Feb, 2007 Sakthi Sugars@ May, 2006 Subex March, 2006 LML March, 2005 LML August, 2005 ANG Auto May, 2007 Sakthi Sugars@ May, 2006 Shah Alloys@ Sept. 2006 Bharat Forge* June, 2006 Rolta India June, 2007 Strides Arcolab June, 2007 Pokarna March, 2007 Gremach Infra.@ Feb, 2008 Bharat Forge* June, 2006 Orchid Chemicals Feb,2007 Helios & Matheson Info. 2006-07 Paramount Comm.* Nov, 2006 Gemini Comm.** July, 2007 Rasandik Engg April, 2006 Prime Focus Dec, 2007 Strides Arcolab April, 2005 Aarvee Denims April, 2007 Balkrishna Industries Dec, 2005 Faze Three #@ Dec., 2006 Kanoria Chem.& Ind.*** June, 2006 Hind. Construction March, 2006 ISMT Nov., 2006 Aurobindo Pharma 2005-06 Suryajyoti Spin. Mills@ Feb,2007 Bajaj Hindustan@ Feb., 2006 India Cements May, 2006 Ruchi Infrastructure Feb., 2007 Amtek Auto June, 2006 Wockhardt Oct, 2004 Hikal Oct, 2005 Surya Pharma Sep., 2005 Geodesic Information Jan, 2008 Easun Reyrolle @ Dec, 2007 Kinetic Engineering Feb, 2008 GHCL Sept, 2006 Micro Technologies July, 2007

Mar, 2011 USD 33 mn March, 2011 USD 60 mn May, 2011 USD 150 mn 2012 USD 100 mn May, 2011 USD 50 mn April, 2012 Euro 30 mn Feb, 2012 USD 50 mn May, 2009 USD 40 mn March, 2011 USD 180 mn 2008 USD 20 mn August, 2010 USD 6 mn May, 2010 USD 12 mn May, 2009 USD 20 mn 2011 USD 10 mn April, 2013 USD 39.9 mn June, 2012 USD 150 mn June,2012 USD 100 mn March, 2012 USD 12 mn Feb, 2012 USD 50 mn April, 2012 USD 40 mn Feb,2012 USD 175 mn July, 2011 USD 25 mn Nov, 2011 USD 27 mn June, 2012 Euro 15 mn April, 2009 USD 10 mn Dec, 2012 USD 55 mn April, 2010 USD 40 mn April, 2012 USD 20 mn Dec, 2010 USD 22 mn Dec., 2011 USD 8 mn June, 2011 USD 20 mn March, 2011 USD 100 mn Nov., 2011 USD 20 mn 2010 USD 60 mn Feb,2012 USD 10 mn 2011 USD 120 mn May, 2011 USD 75 mn Jan, 2012 USD 40 mn June, 2011 USD 250 mn Oct, 2009 USD 110 mn Oct, 2010 USD 12 mn Sep., 2008 USD 12 mn Jan, 2013 USD 125 mn Dec, 2012 USD 35 mn Feb, 2013 USD 18 mn Sept, 2011 USD 80.5 mn July, 2012 USD 15 mn

232.96 566.39 1483.61 466.55 1292.23 430.85 714.04 282.66 886.00 56.71 56.71 400.92 270.88 175.00 1080.22 1022.21 669.52 427.20 376.36 861.20 512.64 179.82 77.14 359.64 218.21 1946.93 490.63 218.83 1481.29 85.00 76.56 341.65 141.62 723.59 85.00 465.40 451.33 67.92 613.71 629.85 987.57 201.04 418.281226 400 186.4824 222.50 448.21

32.35 103.75 291.35 97.20 291.35 97.20 162.60 64.50 202.60 13.00 13.00 93.90 64.50 42.45 267.35 262.20 172.20 110.30 114.90 267.35 161.35 57.15 25.30 118.25 72.00 679.75 172.20 77.20 542.50 32.10 28.95 132.00 55.65 291.35 34.40 188.55 186.80 28.20 255.85 266.20 417.40 85.35 179.50 176.50 84.05 102.05 206.05

% inc. / (dec.) reqd. in CMP to bring it equv. to eff. conv. price 620.11 445.92 409.22 379.99 343.53 343.26 339.14 338.23 337.32 336.19 336.19 326.96 319.97 312.25 304.05 289.86 288.80 287.31 227.55 222.13 217.72 214.64 204.89 204.14 203.07 186.42 184.92 183.45 173.05 164.80 164.46 158.83 154.49 148.36 147.09 146.83 141.61 140.83 139.87 136.61 136.60 135.55 133.03 126.63 121.87 118.03 117.52

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Analysis Beyond Consensus Table 10: List of companies where FCCB's are outstanding (contd.) S No Company Month of Maturity Issue Effective issue Period Size conversion price

Current Market price as on 31.03.08

% inc. / (dec.) reqd. in CMP to bring it equv. to eff. conv. price 116.84 115.73 115.48 114.69 113.23 109.90 106.96 105.56 104.96 103.08 98.95 98.37 97.81 96.29 94.42 93.24 92.64 91.80 89.59 86.69 85.40 82.92 76.95 76.95 73.92 73.21 70.67 69.11 68.88 65.17 62.10 61.13 61.13 57.83 57.20 55.86 54.95 54.69 52.13 50.66 48.96 48.08 47.86 45.00 41.08 37.61 37.22

48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94

Financial Technologies 2006-07 Orchid Chemicals Nov, 2005 Webel Solar Energy@ Oct, 2007 JCT April, 2006 KEI Industries Nov., 2006 Pioneer Embroideries@ May, 2007 Ranbaxy Laboratories March, 2006 Vivimed Labs@ Dec.,2006 Radico Khaitan July, 2006 Tata Motors June, 2007 MSK Projects May, 2006 Videocon Industries July, 2006 Nectar Lifesciences April, 2006 Spicejet Dec, 2005 Hotel Leela Venture* Sept, 2005 Vardhman Polytex@ Feb, 2008 Tulip IT Services June, 2007 Bartronics India@ Jan, 2008 Gati Dec., 2006 Bharat Forge* May, 2005 Sharon Bio-Medicine@ Nov, 2007 Rajesh Exports*** Feb, 2007 Wanbury@ April, 2007 Wanbury@ April, 2007 Dolphin Offshore** Dec, 2005 Assam Company Nov., 2006 Videocon Industries Feb, 2006 Reliance Communications Feb, 2007 Aksh Optifibre Jan, 2007 JSW Steel June, 2007 Karuturi Networks@ Oct, 2007 Alok Industries June, 2005 Alok Industries June, 2005 Everest Kanto Cylinders Oct, 2007 Plethico Pharma@ Oct, 2007 Tata Steel Aug., 2007 Tantia Construction@ July, 2007 Lupin** Jan, 2006 Panacea Biotec Feb.,2006 Grabal Alok Impex@ March, 2007 Bilcare Dec, 2005 Shri Lakshmi Cotsyn@ Sept, 2007 Pyramid Saimira Ttr.@ July, 2007 Kamat Hotels March, 2007 Suzlon Energy*@ Oct, 2007 Jaiprakash Associates* Feb, 2005 Great Offshore@ Oct, 2007

Dec., 2011 Nov, 2010 Nov, 2012 March, 2011 Oct., 2011 May, 2012 March, 2011 Dec.,2011 July, 2011 June, 2012 May, 2011 July, 2011 April, 2011 Dec, 2010 Sept, 2010 Feb, 2013 August, 2012 2013 Dec, 2011 April, 2010 Dec, 2012 Feb, 2012 2012 2012 Dec, 2010 Nov., 2011 March, 2011 Feb, 2012 Jan, 2010 June, 2012 Oct, 2012 June, 2010 June, 2010 Oct, 2012 Oct, 2012 Sept, 2012 July, 2012 Jan, 2011 Feb. 2011 March, 2012 Dec, 2010 Sept, 2012 June, 2012 March, 2012 Oct, 2012 Feb, 2010 Jan, 2013

USD 100 mn USD 42.5 mn USD 16.8 mn USD 30 mn USD 36 mn USD 30 mn USD 440 mn USD 12 mn USD 50 mn USD 450 mn USD 8 mn USD 105 mn USD 35 mn USD 80 mn Euro 60 mn USD 12 mn USD 150 mn USD 50 mn USD 20 mn USD 60 mn USD 16.5 mn USD 150 mn Euro 15 mn Euro 7 mn USD 15 mn USD 48 mn USD 90 mn USD 1 bn USD 8.75 mn USD 32.5 mn USD 50 mn USD 15 mn USD 55 mn USD 35 mn USD 75 mn USD 875 mn USD 7.5 mn USD 100 mn USD 50 mn USD 20 mn USD 50 mn USD 15 mn USD 90 mn USD 18 mn USD 200 mn USD 100 mn USD 42 mn

3476.45 348.07 540.00 15.99 125.16 223.96 908.04 185.00 224.94 1266.74 199.35 608.89 396.70 80.08 78.06 106.86 1643.35 290.00 184.85 499.12 315.00 142.04 175.00 175.00 308.27 43.13 523.86 859.60 74.73 1352.89 290.00 91.76 91.76 430.47 604.7325 1080.35 140.00 764.03 510.61 144.64 1278.38 150.00 454.00 269.26 371.88 311.83 875.00

1603.25 161.35 250.60 7.45 58.70 106.70 438.75 90.00 109.75 623.75 100.20 306.95 200.55 40.80 40.15 55.30 853.05 151.20 97.50 267.35 169.90 77.65 98.90 98.90 177.25 24.90 306.95 508.30 44.25 819.10 178.90 56.95 56.95 272.75 384.70 693.15 90.35 493.90 335.65 96.00 858.20 101.30 307.05 185.70 263.60 226.60 637.65

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Foreign currency convertible bonds/notes Table 10: List of companies where FCCB's are outstanding (contd.) S No Company Month of Maturity Issue Effective issue Period Size conversion price

Current Market price as on 31.03.08

% inc. / (dec.) reqd. in CMP to bring it equv. to eff. conv. price 36.57 35.95 35.82 34.00 33.33 33.16 33.02 31.80 31.45 30.64 27.57 26.45 23.13 22.94 22.63 20.00 19.64 17.48 14.82 14.56 12.32 10.35 10.12 9.95 9.34 9.08 9.04 7.84 3.70 2.04 -0.39 -5.10 -5.90 -6.29 -6.63 -7.41 -9.29 -10.11 -11.17 -12.61 -13.91 -14.22 -16.86 -17.68 -18.65 -20.84 -21.15

95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141

Suzlon Energy*@ June, 2007 South Asian Petrochem@ Nov, 2007 Electrost Cast* May, 2006 Moser Baer*@ June, 2007 Shrenuj & Co.@ Jan, 2007 XL Telecom & Energy @ Oct, 2007 Amtek India@ Oct,2005 Electrotherm India@ June, 2007 Bharti Shipyard Dec., 2005 Graphite India* Oct, 2005 Megasoft@ Sept, 2005 Sayaji Hotels July, 2006 Surana Industries@ June, 2007 Reliance Communications May, 2006 Jindal Saw July, 2006 Shrenuj & Co.@ Jan, 2007 Moser Baer*@ June, 2007 Man Industries*@ May, 2007 PSL Aug.,2005 GTL Infrastructure@ Oct, 2007 Aban Offshore April, 2006 Jindal Stainless Dec, 2004 Punj Lloyd* April, 2006 Amtek Auto June, 2005 Jaiprakash Associates*@ Sept, 2007 Gayatri Projects August, 2007 Educomp Solutions July, 2007 Adlabs Film Jan, 2006 United Phosp.@ Jan., 2006 NIIT**@ April, 2005 Tata Chemicals Jan, 2005 Ashok Leyland* April, 2004 Monnet Ispat Feb.,2006 Zee Entertainment Enter. April, 2004 Bharti Shipyard Dec., 2005 Bartronics India@ June, 2007 Ankur Drugs@ May, 2006 Cranes Software Feb, 2006 Tata Teleservices (Mah.)@ July, 2004 Tata Motors April, 2004 Core Project & Tech.*@ May, 2007 United Phosp.@ Jan., 2006 McNally Bharat Engg.@ Oct., 2006 Panacea Biotec Feb.,2006 Jain Irrigation March, 2006 Nava Bharat Ventures Sept, 2006 Dishman Pharma* Aug, 2005

June, Nov, May, June, Jan, Oct, Oct, June, Dec., Oct, Sep., July, June, May, July, Jan, June, May, Aug. Oct, April, Dec, April, June, Sept, July, Jan, Jan, April, Jan, April, Feb., April, Dec., May, March, July, April, Jan, Oct., Feb. March, Sept, Aug,

2012 USD 300 2012 USD 20 2011 USD 75 2012 USD 75 2012 USD 7.5 2012 USD 40 2010 USD 75 2012 USD 10 2010 USD 80 2010 USD 40 2008 USD 8 2011 USD 7.5 2012 USD 25 2011 USD 500 2011 JPY 9090 2012 USD 7.5 2012 USD 75 2012 USD 50 2010 USD 40 2012 USD 300 2011 Yen 11610 2009 USD 60 2011 USD 125 2010 USD 150 2012 USD 400 2012 JPY 3080 2012 USD 80 2011 Euro 84 2011 USD 80 2010 USD 10 2010 USD 150 2009 USD 100 2011 USD 60 2009 USD 100 2008 USD 20 2012 USD 25 2011 USD 16 2011 Euro 42 2009 USD 125 2009 USD 100 2012 USD 80 2011 USD 70 2011 USD 10 2011 USD 50 2011 USD 60 2011 JPY 6000 2010 USD 50

mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn mn

360.00 22.5 60.44 203.82 50.00 260.00 120.12 600.00 711.98 67.35 115.00 107.67 140.00 624.88 796.03 45.00 181.98 143.50 336.89 53.04 3397.33 155.76 343.08 281.30 247.76 455.58 4161.92 661.23 272.00 100.00 279.71 33.50 457.50 229.27 505.74 140.00 164.00 129.76 24.96 545.09 165.72 225.00 143.00 276.30 481.65 171.94 227.47

263.60 16.55 44.50 152.10 37.50 195.25 90.30 455.25 541.65 51.55 90.15 85.15 113.70 508.30 649.15 37.50 152.10 122.15 293.40 46.30 3024.60 141.15 311.55 255.85 226.60 417.65 3817.00 613.15 262.30 98.00 280.80 35.30 486.20 244.65 541.65 151.20 180.80 144.35 28.10 623.75 192.50 262.30 172.00 335.65 592.05 217.20 288.50

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Analysis Beyond Consensus Table 10: List of companies where FCCB's are outstanding (contd.) S No Company Month of Maturity Issue Effective issue Period Size conversion price

Current Market price as on 31.03.08

% inc. / (dec.) reqd. in CMP to bring it equv. to eff. conv. price -25.68 -26.72 -26.86 -27.67 -27.77 -27.82 -27.92 -30.41 -30.84 -31.02 -33.26 -33.63 -34.87 -35.52 -36.81 -36.81 -37.47 -38.61 -39.41 -41.65 -41.65 -49.72 -52.64 -53.18 -54.43 -54.53 -56.12 -59.80 -67.32 -71.14 -78.40 -85.06 -86.16 -88.54 N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188

Sun Pharmaceuticals Nov, 2004 Prajay Engg@ July, 2006 HDFC Ltd Aug., 2005 United Spirits March, 2006 JBF Industries@ Nov., 2005 HEG Ltd@ June, 2005 Sintex Industries Feb, 2008 Shiv Vani Oil Dec, 2005 Glenmark Pharma** Feb, 2005 Glenmark Pharma** Feb, 2005 Monnet Ispat Feb.,2005 Motherson Sumi** Aug.,2005 Jaiprakash Associates* March, 2006 S Kumar Nationwide@ April, 2006 ICSA India*@ April, 2007 ICSA India*@ March, 2007 Guj, NRE Coke** March, 2006 Glenmark Pharma** Jan, 2006 Welspun Gujarat Nov., 2005 Tata Power Feb, 2005 IVRCL Infrastructure@ Nov, 2005 Mercator Lines**@ May,2005 Sterling Biotech**@ Sept, 2004 Tata Motors July, 2003 Grabal Alok Impex@ 2005 Sterlite Inds*** Oct, 2003 Gujarat NRE Coke** March, 2005 Reliance Natural@ May, 2006 Educomp Soltutions Oct, 2006 Bharti Airtel Ltd. April, 2004 Welspun Guj. Stahl Roh. Dec., 2004 Adani Enterprises* Oct, 2004 Adani Enterprises* May, 2004 Jubilant Organosys* May, 2004 Shakti Pumps May, 2007 KSL Ind. May, 2007 KLG Systel March, 2007 Aksh Optifibre Jan, 2008 Uflex March, 2007 Era Constructions Jan, 2007 Country Club Dec, 2006 Adani Enterprises* Dec, 2006 Adani Enterprises* August, 2006 Aftek Infosys June, 2005 ORG Informatics Nov., 2007 Elder Pharma July, 2007 Pidilite Industries Aug, 2007

2009 USD 350 mn 2011 USD 60 mn 2010 USD 500 mn 2011 USD 100 mn 2010 USD 34.5 mn 2010USD 28.75 mn 2013 USD 225 mn Jan, 2011 USD 55 mn Feb,2010 USD 50 mn Feb,2010 USD 20 mn Feb., 2010 USD 60 mn Aug., 2010 Euro 50.3 mn March, 2013 Euro 165 mn April, 2011 USD 50 mn April, 2012 USD 24 mn March, 2012 USD 22 .mn Apr-11 USD 60 mn Jan, 2011 USD30 mn Nov., 2010 USD 75 mn Feb, 2010 USD 200 mn Nov, 2010 USD 65 mn May, 2010 USD 60 mn Sept, 2009 USD 20 mn July, 2008 USD 100 mn 2010 USD 10 mn Oct, 2008 USD 50 mn March, 2010 USD 55 mn May, 2011 USD 300 mn Oct, 2011 USD 25 mn April, 2009 USD 115 mn 2009 USD 40 mn Oct, 2009 USD 38 mn 2009 USD 40 mn May, 2009 USD 35 mn May, 2012 USD 6.5 mn May, 2012 USD 80 mn March, 2012 USD 22 mn Jan, 2013 USD 20 mn March, 2012 USD 85 mn Jan, 2012 USD 75 mn 2011 USD 25 mn 2011 USD 250 mn 2011 USD 250 mn June, 2010 USD 34.5 mn Dec, 2012 USD 16 mn July, 2012 USD 30 mn Aug, 2012 USD 40 mn

Nov, July, Aug., March, Nov., June,

Not Not Not Not Not Not Not Not Not Not Not Not Not

915.20 208.00 1743.43 1090.26 90.00 192.06 255.68 366.59 339.34 338.51 324.47 70.45 147.59 57.00 250.00 250.00 87.10 301.25 232.21 683.79 234.03 39.87 76.39 292.06 43.75 324.50 61.13 40.08 1247.40 238.42 82.80 89.69 83.08 37.21 available available available available available available available available available available available available available

1231.40 283.85 2383.75 1507.30 124.60 266.10 354.70 526.75 490.70 490.70 486.20 106.15 226.60 88.40 395.65 395.65 139.30 490.70 383.25 1171.90 401.10 79.30 161.30 623.75 96.00 713.70 139.30 99.70 3817.00 826.10 383.25 600.50 600.50 324.80 136.10 216.15 560.20 44.25 136.10 593.90 610.85 600.50 600.50 43.10 29.90 379.15 132.85

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Foreign currency convertible bonds/notes Table 10: List of companies where FCCB's are outstanding (contd.) S No Company Month of Maturity Issue Effective issue Period Size conversion price

Current Market price as on 31.03.08

% inc. / (dec.) reqd. in CMP to bring it equv. to eff. conv. price N.A. N.A. N.A. N.A. N.A. N.A. N.A.

189 190 191 192 193 194 195

First Source Solutions Ankur Drugs Zenith Infotech Shetron Brushman (India) Mascon Global Evinix Accessories

Oct, April, July, Jan, Jan, Jan, Feb,

2007 2007 2007 2008 2008 2008 2008

Oct, April, July, Jan, Jan, Jan, Feb,

2012 2012 2012 2013 2013 2013 2013

USD 275 USD 20 USD 50 USD 20 USD 15 USD 50 USD 12

mn mn mn mn mn mn mn

Not Not Not Not Not Not Not

available available available available available available available

36.65 180.80 312.35 58.65 82.60 13.50 143.45

Source: Respective companies' annual reports and RBI Note: @ Conversion price is used instead of effective conversion price, as redemption premium was not available. * Price adjusted for stock split. ** Price adjusted for bonus issue. *** Price adjusted for bonus issue and stock split. # Price adjusted for reverse stock split.

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Analysis Beyond Consensus

NOTES

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Foreign currency convertible bonds/notes

NOTES

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Analysis Beyond Consensus

Limited, Edelweiss Securities Limited 14th Floor, Express Towers, Nariman Point, Mumbai 400 021, Board: +91 22 2286 4400, Email: research@edelcap.com
Naresh Kothari Vikas Khemani Shriram Iyer Co-Head Co-Head Head Institutional Equities Institutional Equities naresh.kothari@edelcap.com vikas.khemani@edelcap.com shriram.iyer@edelcap.com 2286 4246 2286 4206 2286 4256

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