Sunday, January 16, 2011

How banks made money while investors lost - in India

There has been a lot of bashing of banks in the United States over the last three years when the US taxpayer saved banks while the employees of the banks made billions in bonuses. There wasn't a lot of bashing on banks in India though and in November 2010 the bank index climbed to all time high. Sadly though, there were companies and their investors who got punished (I wanted to use a different word but was afraid of getting sued) by a lot of private banks between 2007-2009. Here are two examples that I would like to provide:

Sundaram Brake Linings

The company had a turnover of INR 189 Crore in FY07 and was earning a decent ROCE above 20% till 2007. When the financial markets froze in 2008, the derivative contracts the company had entered into with the help of Axis Bank and Yes Bank backfired. The banks started asking for losses on derivatives but the company refused to pay up and went for suits in Madras high court against both the banks. The banks won the case and now the company has to pay a total sum of 109.48 Crores. Did you read that figure? The company's total profits between 2001-2007 was INR 61.79 Crore. Even if we assume that the company will keep its earning power and will make double the profits between 2008-2015 (prices in India double every 10 years), the company will have to pay almost 90% of its profits in these years as compensation of losses on derivative contracts. The company has already paid these banks over the last three years and the total liability has come down to INR 84.12 Crores in the latest quarter.

HimatSingka Seide

The company had a turnover of INR 174.164 Crore on standalone basis in FY07 and was making above 20% ROCE if the fixed deposits were removed from capital employed. The company had a total derivative MTM loss of USD 41.5 million, i.e. INR 166.5 Crore. The company totally had to write off INR 68.213 Crore in FY09 and FY10. This is more than the net profit of FY07.
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