Kirloskar Systems: Propelling growth

Anand Ram

Recommendation: Accept

GIVEN the fundamentals of Kirloskar Systems and the market perception of its stock, it is recommended that the open offer made to its shareholders be accepted.

The open offer is being made by Kirloskar Oil Engines Ltd (KOEL), another arm of the Kirloskar Group. The offer already in force from November 22, 2001 will end on December 21. The price for acquisition of shares of Kirloskar Systems has been pegged at Rs 55.

It would be in the best interests of shareholders to tender their stakes in Kirloskar Systems because KOEL may proceed to delist the shares of the former after the Open Offer period ends. This would take away what may be only chance to sell the shares later at market value - if there will exist one then.

The open offer is a direct fallout of a Termination Agreement signed by the Kirloskar group with Kirloskar Systems' single largest stakeholder, Chatterjee Holdings (Mauritius) Ltd after they mutually agreed to end the joint venture.

Kirloskar Systems manufactures auto components such as axles, propeller shafts, and so on. The core activities of Kirloskar Systems have shifted since 1998 from the manufacture of electrical apparatus such as circuit breakers and starters to the present group of products.

It has been a loss-making unit since 1999. Despite total income having risen six-fold to Rs 89.11 crore in March 2001, total expenditure too has kept pace with this increase, thus proving to be a drag on profitability. Total expenditure grew six times to 71.08 crore since last year. The numbers for the June quarter too seem to reflect the aggregate performance expected for the rest of the year.

Both secured and unsecured debt have grown in size since March 2000. The current debt-equity ratio of 1.07 can also be a drag on profitability. The company has not declared any dividend in the last three years. Its earnings per share and return on net worth are still languishing in negative territory.

Although the company has 1.82 crore shares listed on the Bangalore Stock Exchange, there has been no trading in the last six months.

Given this background, the opportunity to exit is welcome for shareholders. The terms of offer with regard to the offer price seem attractive. Pegged at Rs 55 a share (Rs 27.50 for partly paid-up shares) it is higher than the book value of Rs 36.23.

Therefore, the price offered for acquisition by KOEL does, indeed, provide a compelling reason to liquidate holdings in Kirloskar Systems. Further, this price is higher when compared to the price offered by the Kirloskar group under the termination agreement with the Chatterjee group.

It may be better to sell when the going is good - it cannot get any better than this. With depressed share earnings levels and a possible lack of exit options in the future, it is best to accept this offer.

Issue opened on November 22, and closes on December 21. The

offer size is 9,49,903 equity shares (5.21 per cent), and the manager is Puneet Advisory Services.