Sunday 5 October 2008

Hindalco's rights issue: A good investment opportunity

HINDALCO INDUSTRIES , the leading aluminium and copper producer in the country, has come out with a rights issue. The net proceeds from the Rs 4,926-
crore issue will be utilised to refinance the bridge loan taken for the Novelis acquisition. Hindalco’s stock price has almost halved since the beginning of the current year to around Rs 98 right now.

Alternatively, investors can buy the share directly from the market at its current price. Obviously , the difference between the two options — buying directly from the market and subscribing to the rights issue — may not be much if the market price is close to Rs 96.

We believe the company’s fundamentals are strong and if investors don’t get a chance to buy the stock from the open market at a price well below Rs 96, they should opt for the rights issue. It’s important to participate in a rights issue, as investors can directly contribute cash to the company, which will be utilised to retire its existing debt.

Any such action will reduce Hindalco’s leverage ratio and provide more scope for the company to finance its ambitious expansion plans through debt at a lower cost. If such debt is not retired, the cost of debt for coming quarters will increase due to a lower credit rating and the turmoil in the global credit market. This, in turn, will lower the earnings of existing shareholders.

The consolidated EPS for FY08 was Rs 19.5. With the current issue of 525.8 million shares, savings in interest payment and assuming a 10% growth in bottomline, EPS for FY09 will fall to Rs 16.5. At the issue price of Rs 96, this translates into a P/E of close to 6. This is well below 7.7, the average P/E for ’08. Also, Hindalco’s share price was trading at around Rs 125 just before the collapse of Lehman Brothers, which sent equity markets in a downward spiral.

The current rights issue of Rs 96 per share offers a good investment opportunity for investors. But if the share price falls well below Rs 96, then investors are advised to purchase it from the open market, rather than opting for the rights issue.

Offer Price: Rs 96 per share

Rights Offer: 3 shares for every 7 held

No Of Shares Offered: 525.8 million

Gross Proceeds Of Issue: Rs 5,047 cr

Current Market Price: Rs 98

Source: Economic Times

No comments:

Post a Comment

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.