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Sowmya Sundar

Recommendation: Reject open offer Sell in the market

SHAREHOLDERS of Raipur Alloys can reject the open offer as the current market price of Rs 30 is three times the offer price of Rs 10 per share.

The question then is: Should shareholders stay with the stock or exit by selling in the secondary market.

Stocks of companies in the steel industry have seen sharp spurts on the back of rising global steel prices and good offtake. Debt restructuring packages have also helped.

The stocks have run up so sharply that a very large proportion of potential improvement in fundamentals may already be captured in the prevailing prices.

Raipur Alloys is no exception. Investors should utilise the steep rally in the stock to exit the stock.

Facts

Chattisgarh Electricity Company and Chattisgarh Investments, along with persons acting in concert (PAC), have made an open offer for 20 per cent of the equity of Raipur Alloys at Rs 10 per share.

The open offer follows the decision to make a preferential allotment to the acquirer and PAC at Rs 10.

Post-preferential allotment, the shareholding of the acquirers will go up from 31.13 per cent to 65.56 per cent.

Hence, the open offer. The offer opens on July 31 and closes on August 29 and the lead manager is Anand Rathi Securities Private Ltd.

The company now makes sponge iron and steel ingots. The equity shares of the target company are listed on The Stock Exchange, Mumbai, Delhi Stock Exchange, Kolkata Stock Exchange and Cochin Stock Exchange.

Rationale

Shareholders can offload their shares in the secondary market using the sharp spurt in the share price in the last few days.

At Rs 30, the stock already factors in the improvement in the industry situation and the better performance.

The stock trades at around six times the annualised per share earnings (based on the half-yearly earnings).

The company plans to raise fresh debt for expansion projects.

Further, equity expansion and the rise in debt might have an adverse impact on the per share earnings.

Also, the valuation of the stock at a price-earnings multiple of six times its historical earnings is on the high side for a small-sized player such as Raipur Alloys.

Such stocks also tend to show volatile price movements, adding to the risk element.

The stock has run-up close to seven times in the last four months. It may be better to take advantage of the present levels.

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