South Asian Petrochem: Inflammable?

Score: Equity - Below Average

FCD - Below Average

S. Muralidhar

SOUTH Asian Petrochem Ltd is making a simultaneous but unlinked issue of 50 lakh equity shares of Rs 10 each for cash at Rs 10 per share aggregating Rs 5 crore, and 69.5 lakh 14 per cent fully convertible debentures (FCD) of Rs 100 each aggregating Rs 69.50 crore. Investors may avoid the equity issue.

Though the coupon rate offered for the FCD at 14 per cent is attractive on paper, there is the risk of conversion into equity two years down the road. This leg of the exercise may also hold prospects of capital loss. In this backdrop, investors may avoid the FCD issue as well, notwithstanding the high investment grade ratings the FCDs carry.

The FCDs have been rated `*AAA r (SO)' by the Credit Rating Information Services of India Ltd (CRISIL) and `CARE AAA (SO)' by Credit Analysis and Research. Both the ratings indicate high safety and low investment risk. However, there is a certain element of risk involved after the FCDs get compulsorily converted into equity shares, two years from the date of allotment.

South Asian Petrochem Ltd (ASPET) has been promoted by the Kolkata-based Dhunseri Group of companies. The company, a 100 per cent export-oriented unit (EOU), is setting up a project for the manufacture of 1.4 lakh tonnes per annum of bottle grade PET resins at Haldia in West Bengal. The company claims that on completion, the project will be one of the largest bottle grade PET resins plants in the country.

The project, expected to cost Rs 450 crore, has been appraised by IDBI, IFCI and Exim Bank. All the three institutions are participating in the project by way of foreign currency loans, rupee term loans and subscription to non-convertible debentures to the extent of Rs 260 crore. The project is also being part financed through the initial public offering (IPO) of shares and FCDs. The three participating institutions have also underwritten a portion of the issue.

The project is being set up in technical and financial collaboration with Zimmer AG of Germany, who, along with Lurgi India Company Ltd, is executing it on EPC basis. ASPET has also entered into a firm buyback agreement with Helm AG and Polytrade GmbH of Germany for export of about 73 per cent of its assumed peak production, being 90 per cent of installed capacity.

The buyback arrangement to be made at prevailing international prices for PET, will be valid for five years. But the mechanism for benchmarking the price and penalty for not honouring the commitment have not been specified in the agreements.

The company has also entered into a memorandum of understanding (MoU) with the two German outfits to source its main raw materials, Purified Terephthalic Acid (PTA) and Mono Ethylene Glycol (MEG). However, ASPET is yet to firm up plans for sourcing all its raw material requirements.

The project is likely to start production by mid-2004. Being an EOU, the company has to export about 75 per cent of its total production to overseas markets. A fall back in terms of sales within the domestic tariff area (domestic market) is available to the company only to the extent of a maximum of 50 per cent. A minimum of 50 per cent of total production has to be mandatorily exported to the highly competitive overseas markets, thereby increasing the company's business risks.

The country's PTA and MEG producers are already facing low offtake and depressed prices. So, sourcing raw materials locally will not be a problem for ASPET, though the prices will be higher than the ruling international prices. The existing capacity for PET within the country is also sufficient to meet the current demand. Growth in demand for bottle grade PET is only expected to come from the aerated beverages segment of the market. However, though the growth as such may be sustained, realisations for PET manufacturers may be under pressure and volatile.

Further, the promoters of ASPET do not have previous experience in the business and this project is an unrelated diversification for the Dhunseri group. The promoters also do not have a track record of achieving promised performance parameters.

The issue opens on December 20 and closes on December 29. The lead manager is Industrial Development Bank of India. The Registrar to the issue is MCS ltd., while the banker is Bank of Baroda.