KCP Sugar and Industries: Accept

Recommendation:Accept

Aarati Krishnan

SHAREHOLDERS in KCP Sugar and Industries Corporation can accept the company's offer to buy back equity shares from public shareholders at Rs 35 per share. The company proposes to buy back 15.51 per cent of its share capital through this route.

Viewed in isolation, the buyback price of Rs 35 per share, which discounts the company's 1999-2000 earnings by just around three times, may not appear attractive. However, valuation levels across the sugar industry stocks are not much better.

Despite the recent policy changes in favour of domestic sugar producers, the threat of competition from imports remains a potent one. In the near term, the surplus situation in the domestic industry is expected to continue, keeping realisations under check. Exports could be the sole avenue for liquidation of excess stocks. Here, larger players with economies of scale would probably be in a better position to offer competitive prices. In the event of decontrol of sugar prices, larger players who have expanded capacities through acquisitions and mergers would have the competitive edge. Therefore, prospects for the middle-level players in the industry such as KCP Sugar remain uncertain.

Moreover, the KCP Sugar stock is listed only on the National Stock Exchange and the Madras Stock Exchange and is thinly traded. Investors wishing to dispose of the stock at short notice may face constraints of liquidity, once the offer concludes.

For now, the buyback announcement has perked up both the volumes of trading and the stock price. The stock, hovering at less than Rs 30 until the last quarter of 1999, has since perked up to Rs 35 levels. Since only a part of the shares tendered to the buyback offer are likely to be accepted, shareholders can first try to exit the secondary market. Failing this, investors can tender before the close of the offer. The offer opens on December 27 and closes on January 22.