TCP: Below Average

Recommendation: Below Average

A. Srikanth

TCP's 2:1 rights offer at Rs. 10 each is to part-finance its diversification project into a coal-based thermal power plant. The company, which makes inorganic chemicals, has recently acquired an unused 63.50 MW coal-based power plant from a company in South Africa. The funds from the rights offer would account for just around 3.05 per cent of the total project cost of Rs. 109.84 crores.

Though most of the funds have come through term loans from the ICICI and Indian Overseas Bank, they are attached with stringent conditions to compensate for the enhanced business risk. With the commissioning of the power plant last September, the company now earns a substantial part of the company's turnover through sale of power to the Tamil Nadu Electricity Board.

Though a post-issue promoters' stake of around 85 per cent reduce the agency costs, it would in no way reduce the business risks associated with such an unrelated diversification. For one, dependence on the State electricity board for sale of power exposes the company to payment-related risks. Any delay, which cannot be ruled out, could strain the finances of the company. At the same time, the company is also exposed to other occupational hazards of changes in Government policies on power tariffs and so on.

The company, already an importer of chemicals, proposes to use imported coal for its operations. This exposes the company to currency-related risks which, in the recent times, has become a serious issue, threatening the viability of many projects.

If the experience of other power companies is anything to go by, operational hurdles and infrastructural bottlenecks could come in the way of achieving the targeted plant load factor. This could, in turn, affect the profitability of the operations. The company's inexperience in the power business could be another disadvantage.

In this background, it appears that the foray into the power project would adversely tilt the risk-return balance. For the ordinary shareholders of the company, it appears that any fresh investment may not be worth the risks that are involved in the project. It is advisable that the ordinary shareholders stay away from this issue.