Dharamsi Morarji Chemical: Reject

Recommendation: Reject

S. Muralidhar

DHARAMSI Morarji Chemical Co. Ltd is making a rights issue of shares at a face value of Rs 10 per share in the ratio of 2:1 to its existing shareholders.

Based on the company's current performance and future prospects, the rights offer is unattractive. The Dharamsi Morarji Chemical Co. (DMCC) share was trading at Rs 7 on the Bombay Stock Exchange as at the close of trading hours on October 25, 2001.

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The company has been quite successful in raising funds through the rights issue route during the 1960s. But after that, capital expansion has been due to a slew of bonus issues, thanks to profits largely due to DMCC's main product single superphosphate (SSP). DMCC has made a total of four rights issues in the past, and as many as seven bonus issues.

The company's product mix is dominated by SSP, while the other chemicals manufactured by it include sulphuric acid, sulfamic acid, oleums, ammonium sulfamate, diethyl sulphate and chlorosulphonic acid. The company's performance during the year 2000-01 was hit due to poor offtake of SSP, particularly in the drought-hit states of Madhya Pradesh, Chattisgarh, Gujarat, Rajasthan and parts of Maharashtra. These are major marketing areas for the company and though the rainfall in these states have improved during the current fiscal, it is unlikely to lead to any dramatic turnaround in prospects for DMCC.

The reason for the company slipping into the red during 2000-01 was an extraordinary item of Rs 3.25 crore, accounted for due to a change in the method of amortisation of lease rent, in respect of lease rentals incurred from April 1, 1996. However, it must be noted that the company's bottomline has been slipping up since 1997. There was a consistent decline in its performance since then. DMCC's earnings per share (EPS) declined to Rs 0.13 (before accounting for the extraordinary item) during 2000-01 as compared to a high of Rs 14.03 in 1996-97.

The company is also feeling the heat from the general slowdown in the chemicals industry, which has resulted in a continuation of low capacity utilisation at its three chemical plants. DMCC management has said that the company is exploring the possibility of undertaking contract manufacturing and strategic alliances, to improve capacity utilisation. However, no contracts have been signed yet.

DMCC is making the rights issue to augment long-term resources to meet working capital requirements and to repay a part of its unsecured loans. The requirement of funds are as per the company's own estimates and these have not been appraised by any financial institution or bank.

DMCC shareholders may reject the current rights issue of the company as the scope for appreciation appears limited.

Offer price :Rs 10

Offer size :67,63,437 equity shares aggregating Rs 6,76,34,370.

Promoters :R.M Goculdas & Associates.

Issue opened on :September 28, 2001.

Issue closes on :October 29, 2001.

Lead Manager :Strategic Capital Corporation Pvt. Ltd.

Registrars to the issue :IIT Corporate Services Ltd.

Bankers to the issue :HDFC Bank Ltd.