Birla Corp: Below Average

Recommendation: Below Average

S. Vaidya Nathan

BIRLA Corp has at last made a rights offer. This has been in the making for quite some time now and the company has been forced to take a a re-look at it and also cut the price.

The initially indicated price was in the Rs 30-32 range. It is down to an offer price of Rs 19 per share. This is in line with the trends in the stock price. The rights offer is being made in the ratio of two shares for every five held.

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Birla Corp is a diversified company with interests in cement, jute, calcium carbide, synthetics, viscose and cotton yarn and auto trim parts among others. The company's major line of business has been cement, though it started off as a jute major. It has sustained losses of close to Rs 140 crore in the last three years. The company has not met the indications of performance given at the time of the previous rights offer in August 1999.

The jute mill remained closed for 110 days in the last 12 months. The cement business contributes close to 80 per cent while jute accounts for 12 per cent of the revenues. Given the relatively small share of non-cement businesses in the revenue stream and the competitive nature of each line of business, it is doubtful if they are significant contributors to the shareholder earnings.

In this context, it may be better to evaluate the company almost as a pure cement play. Also, in this context, the indications of the Birla group to sell its cement units and the subsequently back-tracking has to be taken note off. The company has a capacity of 3.9 million tonnes.

While a couple of years back, this may have seemed a big capacity and made it a top ten player, the industry scenario has now changed. The burst of takeovers and mergers and the entry of MNCs such as Lafarge has led to a consolidation of capacity in the industry. The top six today account for close to 55 per cent of the capacity and this level of concentration at the top may only increase.

One to two million cement plans, barring one or two in select locations, have become passe and soon companies even with three to four million tonnes, especially in cement surplus regions, may find the going tough. They may eventually be forced to sell out or exist as marginal players. The location of the capacities in Madhya Pradesh, Rajasthan and West Bengal, is a cause of concern for Birla Corp. The dispersed nature of small capacities may also make the going difficult.

The company could well be a participant in the consolidation process. The possibilities of unit-by-unit sale and the sale of the cement business as a whole cannot be ruled out. The rights offer is intended to upgrade capacity and help the company partially meet the cash losses of Rs 48 crore incurred in the last three years. As it is, it is doubtful if the proceeds of the rights offer would enhance the competitive position of the company in a sustainable way.

It may manage to do well for a quarter or two on the back of the stage-managed spurt in cement prices. But from a medium-to-long-term perspective, it is difficult to see the company delivering value to its shareholders. Even if it participates in the restructuring process underway in the industry, the huge debt burden of Rs 320 crore may make it difficult for any meaningful return of cash to shareholders. In this backdrop, it may be better for shareholders in general to skip the rights offer

The flip side is that investors could miss out on some restructuring-led gains. But since the timing, quantum and distribution of such gains (if at all any) is riddled with uncertainty, the risks far outweigh taking an exposure. Only shareholders with a penchant for high risks and can accept the possibility of losing out on fresh monies invested, can consider exposures to capitalise on any restructuring/consolidation-driven gains.

Issue Type :Equity

Offer Price :Rs 19 per share

Offer Size :Rs 41.80 crore

Industry Class :Diversified

Offer Opens :January 17, 2001

Offer Closes :February 15, 2001

Project Cost :Rs 41.80 crore

Equity Base :Rs 77.01 crore

Lead Manager :Lodha Capital Markets

Listing :NSE, Mumbai, Calcutta and Delhi