Zee Entertainment Enterprises Ltd (Rs.134.52)

I want to The likelihood of USD depreciation or appreciation against the INR depends on various economic factors and trends. Here are key considerations for each scenario. a few points here:

Q. What is the coupon rate of FCCBs?

Ans. The coupon rate is 5%, which will be applicable for 10 years. This is substantially lower than the 11%/12% PLR which is generally available in India. 

Q. What is the conversion price of FCCBs after 10 years?

Ans. The conversion price is Rs.160 per share. 

Q. What is the total consideration under FCCB?

Ans. The total amount is$239 million (Rs.1960 Cr).

Q. Is there any problem of equity dilution in the short term?

Ans. Let us first read the news on the topic from CNBC TV18 website:

The FCCBs will be issued to Resonance Opportunities Fund, St. John's Wood Fund Ltd. and Ebisu Global Opportunities, on terms and conditions mutually decided between the company and the 'proposed' investors.

Zee Entertainment further said that these FCCBs will carry a coupon of 5% per annum and will be unsecured and unlisted in nature with a maturity period of 10 years.

In case all the FCCBs are converted to equity, it will result in a post-money dilution of 11.7%. As of the June quarter, promoter stake in Zee Entertainment is currently at 3.99%.

In the short term there will not be  any issue of equity dilution. In future a rise in top and bottomlines of the company will take care of equity dilution (if any), especially when the June, 2024 quarter results are good.

Q. Does ZEEL have presence in OTT platform?

Ans. ZEEL has presence both in Television segment and the OTT platforms. ZEE5 is the brand new digital entertainment destination launched by Zee Entertainment Enterprises Ltd. It is in OTT platform. 

Hence, if competition hardens in the TV space, it may shift a substantial chunk of its business or shift altogether to the OTT platforms. 

Q. What could be approximately price of the ZEEL shares after 10 years?

Ans. It is hard to predict its price after 10 years, however if we take an incremental INFLATION figure into consideration we could see a substantial rise in its share price (as a going concern) considering the current management guidance and their optimism.

Q. What does the company want to do with the FCCB?

Ans. This is an Irrelevant question, since such funds are generally used for the benefit of any company. Hope the management, under the able leadership of Puneet Goenka will utilise the funds to increase shareholders value.

Q. Since it is FCCB and hence it is affected by the USD ($) Vs INR (Rs) ratio. Will it have any adverse effect on the company?

Ans. If the USD ($) depreciates, it will generally benefit the Indian company that has issued Foreign Currency Convertible Bonds (FCCBs).

Reasons:

💢Lower Repayment Cost: FCCBs are denominated in USD ($), so the company needs to repay the bondholders in that currency. If the USD depreciates against the Indian Rupee (INR/Rs), the company will need fewer INR to buy the required USD for repayment. This reduces the overall cost of repayment.

💢Conversion to Equity: FCCBs have an option for bondholders to convert their bonds into equity at a predetermined conversion price. For example in this case the conversion price is Rs.160.

If the USD depreciates, the value of the conversion option may be less attractive to bondholders, as they might receive fewer INR for the same amount of USD. However, this primarily affects the bondholders and not the issuing company directly.

Overall, a depreciating USD will reduce the financial burden on the Indian company when it comes to repaying the principal and interest, thereby benefiting the borrower.

Q.  What is the chance of USD depreciation in future, considering the excessive money printed by fed?

Ans. There's a possibility that the USD could depreciate in the future if the U.S. Federal Reserve (FED) continues to print a significant amount of money. Let's find out how:

💢Inflation Risk: When the US Fed prints more money, it increases the money supply. If this increase outpaces economic growth, it can lead to inflation, where the value of each USD decreases because there are more dollars chasing the same amount of goods and services. 

This inflationary pressure can cause the USD to lose value relative to other currencies.

💢Decreased Confidence: Excessive money printing can lead to concerns about the long - term value of the USD. If investors and foreign governments lose confidence in the stability of the dollar, they may shift their investments to other currencies or assets, leading to a decrease in demand for the USD and, consequently, its depreciation.

A 15 July, 2024 edition of The Hindu says: "India and Russia have doubled their payments in national currencies (rupee-rouble) since last year despite sanctions by the U.S. and European Union, said Russia's largest, state-controlled bank Sberbank that handles a majority of payments for Indian exports to Russia". 

💢Interest Rates: To counter inflation, the US Fed might eventually raise interest rates. While higher rates can attract foreign investment (which might strengthen the USD), the timing and effectiveness of such measures are uncertain. If the inflationary impact of money printing is not contained, the depreciation risk remains.

💢Global Economic Factors: The USD's value is also influenced by global economic conditions, such as the strength of other currencies, geopolitical events, and trade balances. While money printing is a significant factor, it's not the only one that determines the USD's exchange rate.

In summary, excessive money printing by the US Fed could contribute to a future depreciation of the USD, especially if it leads to high inflation or erodes confidence in the currency. However, the actual impact will depend on a range of economic and policy factors. I believe there is more chance of USD depreciation than appreciation.

Q. If the USD depreciates then will the bond holders ask their money back or convert into equity? Which one is more likely?

Ans. If the USD depreciates, the decision by bondholders to either ask for their money back (redeem the bonds) or convert them into equity will depend on several factors, including the bondholders' expectations about the future value of the equity and the terms of the Foreign Currency Convertible Bonds (FCCBs). Let's look at the few hypothetical scenarios:

💢Redemption of Bonds (Asking for Money Back):

   💠Depreciating USD Impact: If the USD depreciates, the value of the repayment in USD decreases in terms of the bondholders' local currency. This might make bondholders more inclined to redeem the bonds, especially if they believe that the value of the equity (in INR) will not compensate for the loss due to currency depreciation.

   💠Risk Aversion: Bondholders who are risk-averse or unsure about the future performance of the issuing company’s stock might prefer to get their money back, especially if they expect further depreciation of the USD.

💢Conversion into Equity:

  💠Attractive Equity Valuation: If the company's stock is performing well or is expected to perform well, bondholders might opt to convert their bonds into equity. This could be particularly appealing if they believe that the potential gains from the stock market will outweigh the losses from the depreciating USD.

  💠Hedge Against Currency Risk: Converting into equity might also serve as a hedge against further depreciation of the USD. By holding equity in an Indian company, bondholders can benefit directly from any appreciation in the company’s stock, which might also appreciate due to a stronger INR.

Q. What if the USD appreciates Vs INR, then what option will the bond holders likely to take?

Ans. If the USD appreciates against the INR, bondholders will likely evaluate their options based on the following considerations:

💢Redemption:

   💠Higher Repayment Value: If the USD appreciates, the value of repayment in INR terms increases. Bondholders may find that redeeming the bonds is more attractive because they will receive a higher amount in INR compared to when the USD was weaker.

   💠Risk Management: For bondholders who prefer to avoid currency risk or seek a stable return, redemption might be preferred to secure the higher INR value now rather than potentially facing future uncertainties.

💢Conversion into Equity:

  💠Potential for Equity Growth: If the company's stock is performing well or is expected to perform well in future or is much above the agreed conversion price into equity bondholders might see potential for higher returns from the company's stock than from redeeming the bonds.

 💠Hedging Against Currency Risk: Conversion into equity could also be viewed as a way to hedge against further fluctuations in currency exchange rates, especially if bondholders expect continued volatility.

💢Bond Terms and Company Performance:

   💠Conversion Price: If the conversion price is favorable and the company’s stock is expected to appreciate, bondholders might choose conversion even with a stronger USD, as the potential gains from equity could outweigh the benefits of redemption.

  💠The Company’s Financial Health: The company’s performance and growth prospects will heavily influence this decision. A strong-performing company with good future prospects may make equity conversion more appealing despite the appreciation of the USD.

💢Market Conditions:

   💠Overall Market Sentiment: The broader market conditions and investor sentiment towards the company's sector can impact the decision. If the market outlook for equities is positive, bondholders might be inclined to convert.

The Summary:

💠Redemption: Bondholders might opt for redemption if the stronger USD results in a significantly higher INR repayment amount, especially if they prefer stability or are risk-averse.

💠Conversion: If the company’s equity offers promising growth prospects or if bondholders believe that converting into equity will yield better returns in the long run, they might choose to convert despite the stronger USD.

In essence, the decision will depend on the bondholders' assessment of the company’s future performance, their risk tolerance, and the comparative advantages of redeeming the bonds versus converting into equity.

Q. Which is likely for the USD? Appreciate or Depreciate?

Ans. Predicting the future movement of currencies, including whether the USD is more likely to depreciate or appreciate, involves considering a variety of economic factors and conditions. Here are some key factors to consider:

💢Points Supporting USD Depreciation:

      💠Monetary Policy:

    - Excessive Money Printing**: If the Federal Reserve prints too much money, it can lead to inflation and a decrease in the value of the USD.

         - Low Interest Rates: Extended periods of low interest rates can make the USD less attractive to investors seeking higher returns.

      💠Trade Deficits:

   - Continued Trade Imbalances: Large and persistent trade deficits can weaken the USD as more dollars are exchanged for foreign currencies.

💢Economic and Political Uncertainty:

   - Instability or Uncertainty: Political instability or economic challenges in the U.S. can erode confidence in the USD, leading to depreciation.

💢Global Economic Trends:

   - Rise of Other Currencies: If other major economies (like the Eurozone or China) strengthen their currencies or experience economic growth, the USD might weaken relative to these currencies.

💢Factors Supporting USD Appreciation:

     💠Interest Rate Differentials:

   - Higher Interest Rates: If the Federal Reserve raises interest rates, it can attract foreign investment, increasing demand for the USD and leading to appreciation.

💢Strong Economic Performance:

   - Robust Economic Indicators: Strong U.S. economic performance, including growth, low unemployment, and high consumer confidence, can strengthen the USD.

💢Safe-Haven Status:

   - Global Uncertainty: During times of global economic or geopolitical uncertainty, investors often flock to the USD as a safe-haven asset, leading to appreciation.

💢Fiscal and Monetary Policy:

   - Effective Policy Measures: Strong and effective fiscal and monetary policies can support the USD.

💢Conclusion:

Predicting whether the USD will depreciate or appreciate is complex and influenced by many variables. Historically, the USD has shown both appreciation and depreciation trends based on shifting economic conditions and policy decisions. Keeping informed about current economic indicators and policy actions is crucial for understanding potential future movements of the USD.