Ceat Financial Services: Below average

Score: Below average

Sanjiv Shankaran

CEAT Financial Services (CFS) has approached the primary market with a rights issue of equity share in the ratio of four shares for every one held at an offer price of Rs 10 per share.

The issue plans to raise Rs 110.94 crore which will result in a five-fold increase in its equity capital. Shareholders may consider skipping the rights issue for the following reasons.

CFS was affected by the combination of an industrial slowdown in the late 1990s and a sudden change in regulatory requirements. The impact is captured by the financial statements where CFS registered a net loss over the last two years.

In this environment, CFS faces high levels of defaults by its clients and pressure from deposit holders to redeem their investments. Caught in a pincer grip, CFS has failed to repay its depositors on time. As on July 31 2000, CFS failed to repay Rs 89.34 crore to deposit holders, that is, there was a default on about 61 per cent of its total outstanding fixed deposits.

A positive note here is that the company has the backing of its promoters who hold about 40 per cent of the equity. They have brought in their share of the rights issue money and have ensured that group companies have lent interest-free resources to CFS to meet repayment obligations.

About 90 per cent of the money to be raised through the primary issue is meant to honour CFS' fixed deposit obligations. About Rs 10 crore has been earmarked towards Information Technology (IT) enabled services and strengthening primary dealership activities.

In IT activities, CFS will act in concert with a group company Zensar, a software company. In the light of inadequate details, it may be difficult to gauge the venture's success. As for primary dealership, with increased uncertainty in macroeconomic variables such as interest rate, the risks involved in the business may be higher than anticipated.

That leaves shareholders with the prospect that the rights money will be largely used to meet past commitments. And then the company will have to continue to survive in a market that, in general, has seen falling profitability for financial intermediaries in the wake of increasing competition.

Though the company's share price is presently at about Rs 10.80, an eight per cent premium to the offer price, shareholders may consider avoiding the issue as the prospect of long-term capital appreciation appears bleak.

Issue type :Rights equity issue

Industry type :NBFC

Offer price :Rs 10 per share.

Issue opened on :August 28

Issue closed on :September 26

Lead Manager :Brescon Corporate Advisors

Listing at :BSE, NSE and CSE