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Sunday, June 16, 2013

When Rakesh Jhunjhunwala grilled Aurobindo Pharma brass with some hard questions

This story first appeared in DNA Money edition on Monday, Jun 3, 2013.

It was a ‘rare’ occasion when Rakesh Jhunjhunwala, partner in asset management firm Rare Enterprise, logged into the fourth-quarter earnings call of Aurobindo Pharma on Friday. The multi-billionaire investor was raring to ask the company’s top management some hard questions and pounced on the opportunity as soon as the operator unmuted his line. Here’s what followed, verbatim:

Rakesh Jhunjhunwala (RJ): I’d like to know how much is your net foreign currency (dollar) receipts, considering you have a sale of Rs 5,800 crore, of which Rs 5,000 crore is from overseas markets. What are your expenses really like, out of this Rs 5,000 crore?

Robert Cunard (RC), CEO, Aurobindo USA: It may be in the range of $250-300 million... I mean exports minus imports and other expenditure in the foreign currency for the year as a whole.

RJ: Right. So what is your net foreign exchange receipts?

RC: In the range of $250-275 million, in import expenditure.

RJ: Import expenditure is about $300 million?

RC: No. Net foreign receipts in dollars is in the range of $250-275 million.

RJ: That means your gross receipts is Rs 5,000 crore, which is nearly $900 million, and you are incurring $600 million expenditure outside India?

(Pin-drop silence from the Aurobindo Pharma side for 15 seconds)

Sudhir Singhi (SS), CFO, Aurobindo Pharma: In that number, domestic sales worth Rs 1,493 crore is there as well.

RJ: Foreign sales is Rs 4,500...

SS: Yes, Rs 4,000 crore is exports sales.

RJ: Rs 4,000 crore is export sales, that means about $750 million.

SS: Rs 4,000 crore divided by 55... that is approximately $725 million.

RJ: Then your expenses is about $400 million?

SS: Sir, that includes the import of raw material for API, which could be a considerable number. This could be a couple of hundred million dollars.

RJ: But you are following I’m told... And, what is your debt in foreign exchange?

SS: Our debt in foreign exchange is approximately $600 million.

RJ: So, you don’t have a natural cover on the debt, no?

SS: No no... Sir, what happened, see, we don’t hedge it from the operations. We have a surplus of about $300 million for which we take for trade operations a working capital borrowing in foreign currency, which is approximately $330-340 million. So, as far as operations are concerned, we are fully hedged.

RJ: No no, but your debt is $700 million, no? What is your debt in foreign exchange?

SS: Yes, the remaining debt (term loan) is repayable somewhere in the years 16, 17, 18, 19 and 20, so we are having a natural hedge by growing exports over a period of time.

RJ: Therefore, are you dividing your forex debt into two parts – one which is payable in the near future or is a permanent debt or one which is payable after a certain period of time?

SS: Yes, we are dividing it into two parts. The debt which is falling (due for) maturity over a period of one year is considered to be sort of working capital or including working capital, short-term loan. If you see that portion, which is about $350-375 million including debt repayable within one year, against which we have an extra hedge, net from the trade operations, i.e. exports minus import...

RJ: Yes, I understand that. But then the balance $300 million debt which is payable over the next 4-5 years, how are you accounting for the loss in foreign exchange there? You are passing it through the profit and loss (P&L) account or capitalising it?

SS: No, we are not capitalising it. Whatever the loss is there – quarter end as well as year end – we restate and charge the difference to the P&L account. So this year, you see our loss on account of forex is being accounted in the P&L account.

RJ: That means if the dollar goes up, you are a net loser.

SS: We will be the loser on the restatement of the loss, notionally.

RJ: If you are charging it to the P&L account, that means today dollar has gone up from Rs 54 as of March 31 to Rs 56.5, so to that extent, on your one-year loan, your loss is covered. But for $300 million, you will have to provide it in the balance sheet.

SS: Yes, every one rupee depreciation on the dollar we would be losing on the restatement Rs 30 crore. For instance, from Rs 54 to Rs 56 today, we are losing Rs 2. As on date if we account for it in our P&L account, we will be the loser by Rs 60 crore.

RJ: On the entire debt?

SS: On the entire debt of $700 million.

RJ: You also have a choice wherein you can differentiate a long-term debt as short-term? Why don’t you charge the loss on long-term debt directly to your balance sheet?

SS: Because we have not exercised the option which the government has given – I recollect two years ago – so we decided as per the accounting standards in the
Institute of chartered accountants that we charge it to the P&L account.

RJ: But that’s not a true reflection of your profits, no?

SS: It isn’t, but please understand that we classify the portion of the forex as interest. So, our interest cost on foreign currency is only 3.75% and if you add the rupee depreciation that has happened, 6.7%, the interest cost would have been 9%, which is nothing, but if we could have taken loan in INR (rupee), our cost would be 9-10%.

RJ: What kind of sales growth are you expecting this fiscal?

N Govindarajan (NG), MD, Aurobindo Pharma: We are clear that it should be over 20%.

RJ: So, that will mean sales of around Rs 7,000 crore.

NG: Yes sir. It will be a little over that number.

RJ: What kind of a margin improvement are you indicating?

NG: We don’t talk about specific numbers, but I’ll put it that we are expecting a minimum improvement of 200-300 basis points in fiscal 2013-14.

RJ: Does cash flow on your budgeted profit allow for any debt repayment?

NG: Yes sir.

RJ: What’s your plan? How much debt do you want to repay?

SS: As we said, we have about $47.5 million loan coming for repayment, which we are confident of repaying in the current year and the rest will continue.

RJ: That means you are repaying $50 million this year?

SS: That’s right sir.

RJ: Ok sir. Thank you.

(Sigh of relief from Aurobindo officials)

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