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Raghuvir Srinivasan

Existing investors in BSES could consider encashing their holdings at the current market price. The stock is ruling firm in the Rs 220-225 range due to the ongoing open offer and is most likely to take a downward journey thereafter. The `sell' recommendation on BSES has been strengthened by fresh developments. The company has called an extraordinary general meeting (EGM) of its shareholders on February 15 to discuss some diversification proposals, which, to say the least, are drastic. The company plans to seek shareholder approval to enter the business of telecom services- cellular and fixed, manufacture of telecom equipment, setting up of infrastructure facilities including port terminals and pipeline for carrying petroleum products and natural gas. Besides, the company also appears interested in the areas of agriculture, health services, mining, film and entertainment, trading and real estate.

These are proposals from a power distribution and generation company whose earnings have been under considerable pressure in the last four quarters. The areas proposed to be entered into bear synergies with the businesses of the Reliance group which is now set to acquire promoter status in the company. The group, with a 44 per cent equity holding, is already the dominant shareholder in BSES and needs just another 7 per cent equity to get majority control of the company. It is set to do that through the current open offer for 20 per cent of BSES's equity.

While BSES's entry into the new businesses may help the Reliance group, it is doubtful if the same can be said for the company itself. BSES is already grappling with several issues in its main business such as the losses in the distribution subsidiaries in Orissa and the generation joint venture in Kerala. Its earnings are already under considerable pressure- they were down 83 per cent to Rs 14.60 crore in the third quarter ended December 31, 2002 and by the company's own assessment the outlook for the last quarter appears none too good.

Again, though a lot was spoken about synergies between power and telecom, realisation has now dawned that telecom is an entirely different play compared to power. That both are high-risk businesses in the current context is another crucial point that is forcing power majors to reconsider their telecom plans. BSES appears oblivious to such concerns. The oil and gas business is related to power only in so far as it supplies the fuel for generation. Yet, BSES wants to enter the complete infrastructure business including ports and pipelines. The proposals to enter agriculture and entertainment will lead BSES farther afield.

BSES's balance sheet could come under considerable strain if these proposals are taken up seriously. The company's risk profile will undergo a drastic change and borrowing costs may increase resultantly. The stock will also cease to be a pure power play. Investors may be better off exiting the stock now with minimal damage.

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