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Sowmya Krishnan

CATERPILLAR Commercial SA, along with its parent, Caterpillar Inc, is making an open offer to acquire the remaining 62.25 per cent equity capital of Hindustan Powerplus Ltd (HPP) at Rs 32 per share. The acquirer currently holds 37.75 per cent in HPP. If the public holding falls below 10 per cent as a result of the open offer, the company would delist the shares from the bourses.

Hindustan Powerplus shareholders can accept the offer for the following reasons:

The offer price is in line with the book value of the company. The return on net worth has been on the lower side compared to its peer group and, hence, the scope for appreciation in the stock price is limited. The average return on net worth for the past three years has been around 7 per cent. In the absence of sufficient triggers in the form of growth prospects and higher profitability, the share has been languishing at Rs 20-25 for almost a year.

The offer price translates into a price-to-earnings multiple of over 15 times its March 2002 earnings per share. The valuation appears to be on the higher side vis-à-vis its close competitor Cummins India, which now trades at a price-to-earnings multiple of close to 12 times its March 2002 earnings per share.

Hindustan Powerplus manufactures diesel engines and generating sets and its main market rival, Cummins India, has been a tough competitor all along. The competitive scenario is only likely to intensify further. Without full technical support from the parent company, HPP might find it difficult to take on competition and record healthy growth rates. The parent company seeks complete control of HPP in order to provide full technical support and, hence, the current open offer.

Moreover, liquidity in the stock is limited. Trading in the stock averages around 1,000 shares per day. The liquidity might fall further after the open offer.

If shareholders decide to hold on, the stock may not fetch good returns. It is, therefore, better to opt out at the current offer price. The offer opened on March 12 and closes on April 10.

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