The board of directors of Eveready Industries has decided to consider the issue of warrants convertible into equity to the promoter group, subject to shareholders’ approval, early next month, purportedly to raise funds.
Insight
The board of directors of Eveready Industries has decided to consider the issue of warrants convertible into equity to the promoter group, subject to shareholders’ approval, early next month, purportedly to raise funds.
But, if the intention was indeed to raise funds, couldn’t it have gone for a rights issue? Besides, why did the company not convert warrants at Rs 95 per share, issued in October 2005, and allow them to lapse in April 2007?
If the process goes through this time, 45 lakh warrants at Rs 58 would translate to around Rs 26 crore. The increase in equity would be from Rs 36 crore to Rs 38 crore and the promoters’ holding would go up to almost 45% from 41% at present. The current market price is around Rs 53.
While it may not have been a very profitable price for the company to convert the shares at — at below Rs 50 earlier — the minority shareholders this time will not gain anything.
Considering the company has no profit, increasing equity will further mean that dividends would be difficult and hence could go against minority shareholders.
On the other hand, if the company’s intention is to pay off its outstanding debt, then, there would be a brighter side to the development.
However, the promoters have always expressed their intention to increase their stake in the company by 4-5% at some point. A rights issue for Eveready could not have been too attractive given the phenomenal rise in metal prices, which have impacted its margins over the last one year and the first quarter.
Besides, given that its Rs 115-crore land deal with HDIL went through only recently, the company could have timed its requirement of funds a little later and offered something more to retail investors.
The company’s turnaround may take a while, but one could expect some losses to be wiped out this quarter from the Rs 12 crore it suffered in the first quarter. Having increased the prices of its batteries substantially over the last few months and the increase in zinc prices slowing down a bit, it could hope to reduce its debt burden by Rs 150 crore.
Gas going good
GAIL (India) Ltd, a major player in gas transmission and distribution, intends to top the Rs 50,000-crore topline mark by 2011. The state-owned company expects eight new gas pipelines, spread over more than 5,000 kilometres, are expected to be completed by 2011. This would double the transmission capacity to around 300 million metric standard cubic metres per day (mmscmd).
Naturally, with the infrastructure in place, the moot question is the assured supply. For this, the management has indicated that GAIL has entered into partnerships or is in talks with companies like IOCL, ONGC, HPCL, BPCL, RIL, Shell and Indian Institute of Petroleum.
Reliance’s KG basin may turn out to be a good source of supply for the company and as and when the supply contacts materialise, it would boost the company’s prospects, coupled with its countrywide network.
Margins are expected to remain stable as regulatory aspects come into picture, while volumes would be the key growth driver.
GAIL has the first mover advantage in city gas distribution projects for supply of pressurised natural gas and compressed natural gas and has recently approached the government for grant of approval to pursue such projects in 230 cities across the country. Although this space holds potential, the revenues will get reflected only in the long term.
The petrochemical segment has shown improved performance with enhanced volumes. However, GAIL is comparatively a small player and there are bigger and proven players in this space.
The company’s financials appear strong to support the expansion plans with a debt-equity ratio of 0.12, which provides good room for leverage. For Q1 FY08, the net sales grew by 4% at Rs 4,245.7 crore with earnings before interest depreciation, taxes and amortisation at Rs 1,038.7 crore, a rise of 10.3% year-on-year. Net profit stood at Rs 685.2 crore, a growth of 16%, in line with the market expectation.
There appears to be no major trigger for the company in the immediate future, and markets normally do not fancy stocks where regulatory concerns over tariffs and subsidy policy always loom large. Again, it is not unusual that the public sector undertaking has big expansion plans.
At an estimated price-to-earnings ratio of 10 for FY08, this one may be a market performer, at best.
Contributed by Ajoy K Das & Devangi Bhuta
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