Hedging!---A new corporate way to lose money
Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Fundamental
Forum Discription: Discuss the operations and finances of any of your companies.Make the other participants aware on the investment opportunities available in a stock on PE free cash flow etc
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=2042
Printed Date: 04/May/2025 at 11:35pm
Topic: Hedging!---A new corporate way to lose money
Posted By: kulman
Subject: Hedging!---A new corporate way to lose money
Date Posted: 25/Jan/2009 at 2:07pm
A plunge in
commodity prices late last year is causing havoc among first quarter
corporate earnings this month, as many companies find themselves caught
on the wrong side of their financial programs to hedge against volatile
moves in oil, corn and grain prices.
Moves to lock in prices when commodities were soaring last summer have
now backfired after the prices suddenly plunged in the final months of
the year, pinching companies from airlines to food makers to oil
providers. At the same time, companies that avoided locking in future
commodity prices should stand to benefit.
"It's a sophisticated business that not everyone is good at," said John
Langston, senior analyst at Dallas-based Hodges Capital Management.
" http://www.marketwatch.com/news/story/Earnings-show-some-caught-wrong/story.aspx?guid=%7B094100C3-40BC-440A-A3A2-C7D418BB8148%7D - Even the best hedgers could get hurt ."
|
We've seen some of this getting reflected in few Indian co's Q3 results as well. Forex is another example.
When corporates become punters, the end results are not that difficult to imagine.
The word 'hedge' looks a misnomer as also in the case of 'hedge funds'.
-------------
Life can only be understood backwards—but it must be lived forwards
|
Replies:
Posted By: Hitesh Shah
Date Posted: 27/Jan/2009 at 6:59pm
Originally posted by kulman
........
"It's a sophisticated business that not everyone is good at," said John
Langston, senior analyst at Dallas-based Hodges Capital Management.
" http://www.marketwatch.com/news/story/Earnings-show-some-caught-wrong/story.aspx?guid=%7B094100C3-40BC-440A-A3A2-C7D418BB8148%7D - Even the best hedgers could get hurt ."
We've seen some of this getting reflected in few Indian co's Q3 results as well. Forex is another example.
When corporates become punters, the end results are not that difficult to imagine.
The word 'hedge' looks a misnomer as also in the case of 'hedge funds'.
|
Looks like quite a few companies got it wrong, be it hedging in commodities or forex.... What remains to be seen is how many of them have shown their losses transparently. Else, that will be the talking point for Q4.
-------------
|
Posted By: kulman
Date Posted: 28/Jan/2009 at 11:19pm
Originally posted by Hitesh Shah
Looks like quite a few companies got it wrong, be it hedging in commodities or forex.... What remains to be seen is how many of them have shown their losses transparently. Else, that will be the talking point for Q4.
|
Hitesh bhai...
while you & me just began discussion about hedging
Corporate India has this menace called...pledging!
Why in the world promoters pledge their shares? Why are they leveraging in such a loony way? Don't they understand that anything which is marked-to-market comes with huge downside risks?
The pledging skeletons started coming out with Orchid, Core, Satyam and now...... http://www.bseindia.com/qresann/news.asp?newsid=%7B74E5FF63-DDF7-4E2D-8DB4-11FEB150080C%7D¶m1=1 - even Asian Paints !!!!
The end to this 'excesses' saga might be uglier than what we have seen so far.
-------------
Life can only be understood backwards—but it must be lived forwards
|
Posted By: Hitesh Shah
Date Posted: 28/Jan/2009 at 11:32pm
Yes, I saw that about Asian Paints. I think the figure was ~ 15%.
But without doing so, they would have to shell out from their pockets for yachts, jets, etc. and Business School teaches them that the only money to be spent is OPM (other people's money).
Incidentally, Citi's proposal to buy a new jet is under scrutiny.
-------------
|
Posted By: kulman
Date Posted: 28/Jan/2009 at 11:41pm
Originally posted by Hitesh Shah
But without doing so, they would have to shell out from their pockets for yachts, jets, etc. and Business School teaches them that the only money to be spent is OPM (other people's money).
|
Umm...really? is there a subject called OPM in business schools? I guess it may not be only in theory but more of practicals. Are there separate Labs?
Perhaps those people must disclose to SEBI about %marks they got in OPM during college days.
-------------
Life can only be understood backwards—but it must be lived forwards
|
Posted By: Hitesh Shah
Date Posted: 28/Jan/2009 at 11:48pm
Let's just be grateful that the boys haven't figured out ways to "securitise" the pledged shares and convert them into STRIPS, etc., etc., etc...
By the way, securitise carries such irony. It's like a one-word oxymoron.
-------------
|
Posted By: kulman
Date Posted: 28/Jan/2009 at 11:57pm
Originally posted by Hitesh Shah
By the way, securitise carries such irony. It's like a one-word oxymoron.
|
 ha ha ha
Like....spendthrift, bittersweet, ballpoint, speechwriting, firewater...
-------------
Life can only be understood backwards—but it must be lived forwards
|
Posted By: Vivek Sukhani
Date Posted: 28/Jan/2009 at 12:02pm
|
Pledging becmes necessary if you want to grow aggressively.
I see no harm with pledging, if the intention is to grow the business and use the proceeds from pledging is used for pursuing and furthering business interests.
At the end of it, what matters is the intention. The best of opportunities get created when the promoters' intentions is wrongly interpreted by the investors.
-------------
Jai Guru!!!
|
Posted By: rakeshmehta48
Date Posted: 28/Jan/2009 at 1:14am
OPM is a secret term meant only to be used by few privilaged tie walas.
-------------
Fund Management is Most Important
|
Posted By: kumardiwesh
Date Posted: 28/Jan/2009 at 1:30am
If promoters have pledged shares, it should be disclosed.
Why should promoters raise money discreetly if their intentions are right?
SEBI has made it mandatory nonetheless.
-------------
"History does not tell you the probability of future financial things happening" - Warren Buffett
|
Posted By: investor
Date Posted: 28/Jan/2009 at 7:46am
Investors dump share-pledging cos
http://economictimes.indiatimes.com/Investors_dump_share-pledging_cos/articleshow/4045003.cms - http://economictimes.indiatimes.com/Investors_dump_share-pledging_cos/articleshow/4045003.cms
-------------
The market is a place where people with money meet people with experience.
The people with experience get the money while people with money get experience!
|
Posted By: Vivek Sukhani
Date Posted: 28/Jan/2009 at 8:30am
Originally posted by kumardiwesh
If promoters have pledged shares, it should be disclosed.
Why should promoters raise money discreetly if their intentions are right?
SEBI has made it mandatory nonetheless. |
Well, to get money you have to put your asset on the block as pledge. So, nothing wrong about it. Its a kind of margin funding, albeit with much less aggressive terms.
Now I agree to your disclosure argument. As an investor, I have full right to work out from what quarters selling can emanate from. Its generally said, that you can bid against any seller, but if the promoters' share enter the market, you better run for cover rather than fighting against it. Infact, SEBI can go one step further to make a detailed declaration about pledged holding. Details would include the terms of the pledge.
If a promoter has pledged 100 shares at Rs. 100 a share to raise 8000, then its no harm if the current share price is Rs. 200. To worry and sell under those circumstances would be quite a panic type of a reaction.
At the end of the day, all we need to know if the pledged shares can hit the market. Other than that, it will be reading too much into the thing. To brandish pledging as speculating is quite unwarranted.
-------------
Jai Guru!!!
|
Posted By: kulman
Date Posted: 29/Jan/2009 at 6:31pm
| “The monies
borrowed have been invested in the purchase of Asian Paints shares through the
secondary market by my family through creeping acquisition. This can be
corroborated by the fact that promoter's holding in Asian Paints has gone up
considerably over the last few years from low 40% to nearly 50% now,” http://economictimes.indiatimes.com/Stocks_in_News/Asian_Paints_painted_blue_on_news_of_pledged_shares/articleshow/4046729.cms - says
the statement released by Ashwin Dani, vice chairman and MD of Asian Paints, to http://economictimes.indiatimes.com/Stocks_in_News/Asian_Paints_painted_blue_on_news_of_pledged_shares/articleshow/4046729.cms# -
|
Posted By: Hitesh Shah
Date Posted: 29/Jan/2009 at 7:49pm
Originally posted by kulman
| “The monies
borrowed have been invested in the purchase of Asian Paints shares through the
secondary market by my family through creeping acquisition. This can be
corroborated by the fact that promoter's holding in Asian Paints has gone up
considerably over the last few years from low 40% to nearly 50% now,” http://economictimes.indiatimes.com/Stocks_in_News/Asian_Paints_painted_blue_on_news_of_pledged_shares/articleshow/4046729.cms - says
the statement released by Ashwin Dani, vice chairman and MD of Asian Paints, to http://economictimes.indiatimes.com/Stocks_in_News/Asian_Paints_painted_blue_on_news_of_pledged_shares/articleshow/4046729.cms# - - exchanges. |
It's rather unconvincing.
|
Agreed. While there may be no arguing with the hike in stake, it is a wobbly foundation!
Perhaps they never dreamed that pledging would be viewed as a dodgy activity!
-------------
|
Posted By: kulman
Date Posted: 29/Jan/2009 at 8:11pm
|
Some of these loans are converted into pass-through certificates
(PTCs), an instrument which transfers the right to receive benefits to
the buyer or holder of such PTC. These PTCs are sold to institutional
investors such as mutual funds and banks. http://businesstoday.digitaltoday.in/index.php?option=com_content&task=view&id=9734§ionid=22&issueid=48&Itemid=1 - Clich here: Living on the (pl)edge
-------------
Life can only be understood backwards—but it must be lived forwards
|
Posted By: Hitesh Shah
Date Posted: 29/Jan/2009 at 8:31pm
Great link!
I'm not good at large figures, but Dani's note to the exchanges mentions pledges over the years for creeping acquisition and the BT article talks of a 65 crore deal in March 2008!
Moral: If you pledge, you could end up on the edge of the ledge...
-------------
|
Posted By: Azure
Date Posted: 10/Feb/2009 at 12:51pm
|
Can anyone tell me how companies lose money by hedging????
|
Posted By: investor
Date Posted: 10/Feb/2009 at 3:49pm
Check this out - even the Tata's are no exception.
|
| Tata Sons pledge entire holding in Tata Coffee |
|
http://www.business-standard.com/india/news/tata-sons-pledge-entire-holding-in-tata-coffee/11/27/54690/on - http://www.business-standard.com/india/news/tata-sons-pledge-entire-holding-in-tata-coffee/11/27/54690/on
Promoters of five Tata Group firms pledged 111 crore shares
http://economictimes.indiatimes.com/articleshow/4105257.cms - http://economictimes.indiatimes.com/articleshow/4105257.cms
Originally posted by kulman
|
-------------
The market is a place where people with money meet people with experience.
The people with experience get the money while people with money get experience!
|
Posted By: gcpradhan1
Date Posted: 10/Feb/2009 at 4:02pm
If any company is pledging shares to borrow money for business needs which the company thinks will pay off later, then what is wrong is pledging? I really do not understand that point.
-------------
Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years - Buffet
|
Posted By: Azure
Date Posted: 10/Feb/2009 at 4:06pm
|
See i didnt said that its wrong....
But its like promoters pledging their personal property for the company.. Isnt???
-------------
If predictions were true then stock markets wouldn’t be this exciting!
|
Posted By: Azure
Date Posted: 10/Feb/2009 at 6:51pm
|
Basantji..
Can you plz tell me how companies lose money by hedging????
-------------
If predictions were true then stock markets wouldn’t be this exciting!
|
Posted By: Hitesh Shah
Date Posted: 10/Feb/2009 at 6:57pm
See http://business.outlookindia.com/inner.aspx?articleid=2503&subcatgid=1116&editionid=67&catgid=20 - this .
-------------
|
Posted By: Azure
Date Posted: 10/Feb/2009 at 7:11pm
Originally posted by Hitesh Shah
See http://business.outlookindia.com/inner.aspx?articleid=2503&subcatgid=1116&editionid=67&catgid=20 - this . |
Hello,
Thanks for that but its not clear yet...
Does that works like this....
Say an IT Company expects $100 Mn. from overseas.. and suppose the Rs. is trading at 40 Rs.
Now they hedge $100 mn. at the rate 40 Rs.,,, now if the Rs. depreciate to say 50 Rs. then they face a loss of $100 mn X 10 Rs.
Is that how it works???
-------------
If predictions were true then stock markets wouldn’t be this exciting!
|
Posted By: kulman
Date Posted: 15/Feb/2009 at 8:15am
Please do change the title of this thread to Hedging & Pledging---A new corporate way to lose money
-------------
Life can only be understood backwards—but it must be lived forwards
|
Posted By: kulman
Date Posted: 15/Feb/2009 at 8:15am
http://www.dnaindia.com/report.asp?newsid=1231111 - Pledges out is only half the story
...industry experts say the iceberg is largely under water.
Independent estimates put the entire pledged portfolio at around Rs 90,000 crore, if not more.
Some
rules are like gowns; cover a lot without touching the vital
points.Others are like bikinis; touch the vital points but cover nothing
-- Anonymous
The latest pledging disclosure norms are proving to be neither a gown
nor a bikini. They do not cover the issue in its entirety, and miss out
many vital points.
|
Please do change the title of this thread to Hedging & Pledging---A new corporate way to lose money
-------------
Life can only be understood backwards—but it must be lived forwards
|
Posted By: Vivek Sukhani
Date Posted: 15/Feb/2009 at 9:06am
|
I have a question........
How would an honest promoter, who is not taking out salries in lieu of the services rendered, and relying just on sitting fees and dividends, get the money to finance further the expansion/investment needs?
I think we need to be practical in the way we are approaching things. Pledging is not a way to lose money, its inevitable if you want to be aggressive with your finance. In good times, its very good and in bad times, its very bad. the t hing to blame is, if at all, is time....not pledging.
If someone is so moralisitic, as investors in today's markets has become, they should be only investing in PSUs and MNCs. MNCs are looking to get back their shares and PSUs have no interest in pledging their shares at all.
-------------
Jai Guru!!!
|
Posted By: Mr. V
Date Posted: 15/Feb/2009 at 10:10am
Originally posted by Azure
Originally posted by Hitesh Shah
See http://business.outlookindia.com/inner.aspx?articleid=2503&subcatgid=1116&editionid=67&catgid=20 - this . |
Hello,
Thanks for that but its not clear yet...
Does that works like this....
Say an IT Company expects $100 Mn. from overseas.. and suppose the Rs. is trading at 40 Rs.
Now they hedge $100 mn. at the rate 40 Rs.,,, now if the Rs. depreciate to say 50 Rs. then they face a loss of $100 mn X 10 Rs.
Is that how it works??? |
If its a plain forward contract, then the Company will not lose money. The loss in the forward contract will be cancelled out by the actual payment which will happen at Rs 50. Essentially, the company locked the revenue at Rs 40 by doing the forward contract.
|
Posted By: Hitesh Shah
Date Posted: 15/Feb/2009 at 10:22am
Originally posted by Vivek Sukhani
I have a question........
How would an honest promoter, who is not taking out salries in lieu of the services rendered, and relying just on sitting fees and dividends, get the money to finance further the expansion/investment needs? ...... |
The other point is that the honest ones have come out.... The ones who are holding shares through other entities not defined as promoters haven't been flushed out by this move.
So, like many of SEBI's moves, there's always a work-around...
-------------
|
Posted By: kulman
Date Posted: 17/Feb/2009 at 8:28am
हम हैं ना....
http://economictimes.indiatimes.com/Stocks/ADAG_Dhoots__UB_group_disclose_share_pledge_details/articleshow/4139399.cms - ADAG, Dhoots & UB group disclose share pledge details
-------------
Life can only be understood backwards—but it must be lived forwards
|
Posted By: Mr. V
Date Posted: 17/Feb/2009 at 8:31am
|
Did ADAG pledge the shares to Reliance Capital ?
|
Posted By: Mr. V
Date Posted: 18/Feb/2009 at 1:54am
It seems like Goldman partners also pledged their shares
http://www.businessinsider.com/goldman-partners-hit-with-margin-calls-2009-2 - Goldman Partners hit with margin calls .
Take a moment to consider the multiple layers of leverage in this story.
First, you have Goldman's stock which was inflated by the bank's huge
leverage. Then you're using that as collateral for margin loans, so
more leverage. And then with that money, you're buying hedge fund and
private equity stakes, which are levered still. Three layers of
leverage. It doesn't take much to get wiped out when you're squeezing
things that far.
|
Posted By: Vivek Sukhani
Date Posted: 18/Feb/2009 at 8:57am
Originally posted by kulman
हम हैं ना....
http://economictimes.indiatimes.com/Stocks/ADAG_Dhoots__UB_group_disclose_share_pledge_details/articleshow/4139399.cms - ADAG, Dhoots & UB group disclose share pledge details |
dangerous list of promoters.......I would not have been surprised by anything wrong that would have come out of this!!!!!
-------------
Jai Guru!!!
|
Posted By: kulman
Date Posted: 18/Feb/2009 at 9:01am
Originally posted by Mr. V
http://www.businessinsider.com/goldman-partners-hit-with-margin-calls-2009-2 - Take a moment to consider the multiple layers of leverage in this story.
First, you have Goldman's stock which was inflated by the bank's huge
leverage. Then you're using that as collateral for margin loans, so
more leverage. And then with that money, you're buying hedge fund and
private equity stakes, which are levered still. Three layers of
leverage. It doesn't take much to get wiped out when you're squeezing
things that far.
|
It's height of leverage .....(L)³
As such one needs to beware of http://www.theequitydesk.com/forum/forum_posts.asp?TID=1484&KW=Lust+Liquor+Leverage&PID=100334#100334 - 3Ls that cause downfall in life : Lust, Liquor & Leverage.
-------------
Life can only be understood backwards—but it must be lived forwards
|
Posted By: kulman
Date Posted: 23/Feb/2009 at 12:00pm
| http://www.business-standard.com/india/news/wockhardts-debt-rises-to-375its-equity/00/03/349807/ - Wockhardt's debt rises to 375% of its equity The Khorakiwala family, the promoters of Wockhardt, had to pledge
about 40 per cent of its stake with financial institutions to raise
about Rs 350 crore, mainly for the expansion of its hospital chain,
said sources.
Reportedly, the company has put on block some of its assets in the
US and Europe, land in Aurangabad and a few large brands in consumer
health care segment.
Further, the posh corporate office at Bandra Kurla
Complex has also been pledged to raise funds.
Recently Wockhardt got
shareholders approval to raise another Rs 500 crore through the issue
of redeemable preference shares for the redemption of FCCBs and for
general corporate purpose.
According to industry observers, costly acquisitions and aggressive
expansion in the past are putting pressure on the company, at a time
when the financial markets are globally down. |
Baap re! At this rate they'd be called Pledgewala !
-------------
Life can only be understood backwards—but it must be lived forwards
|
Posted By: investor
Date Posted: 23/Feb/2009 at 12:02pm
looks like Wockhardt is going to die-hard very soon!
-------------
The market is a place where people with money meet people with experience.
The people with experience get the money while people with money get experience!
|
Posted By: Hitesh Shah
Date Posted: 23/Feb/2009 at 12:14pm
Originally posted by investor
looks like Wockhardt is going to die-hard very soon!
|
On the other hand, maybe worth a nibble given that foreign pharma firms (e.g., Merck) are on the prowl.
-------------
|
|
|
