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Aarati Krishnan

INVESTORS may accept the open offer by the promoter group to mop up 20 per cent of the equity capital in Rana Sugars at Rs 28.5 per share for the fully paid-up share and Rs 14.25 for the partly paid-up share.

The open offer has been triggered by SEBI regulations, after Rana Inder Partap Singh and other members of the promoter group acquired a 46.4 per cent stake in the company through the preferential offer route.

At the open offer price of Rs 28.5, the acquirers are offering a valuation of just five times its trailing annual earnings. But it may be prudent for shareholders to take advantage of the exit opportunity. As a small-sized player in the sugar sector, the company's medium-term prospects are uncertain.

A meltdown in sugar prices, which is likely, given the sharp recovery in production in the coming year (2005-06), could trim the company's profitability significantly.

The company's plans to diversify into steel and power could also strain its finances in the near term. Investors could, thus, tender their holdings to the open offer. In addition, since the market price hovers at about the same levels as the open offer price, risk-averse investors may sell the rest of their holdings in the stock market. Rana Sugars operates a 2,500 tcd sugar unit and cogeneration facilities for power at Punjab. The company's operational performance has improved steadily over the past three years, with a sharp ramp-up in 2004-05. The ramp-up in earnings in 2004-05 appears to be largely explained by the sharp increase in sugar prices and better profitability on co-generated power.

The situation could change in 2005-06, as sugar production stages a sharp recovery, tempering domestic prices. Smaller players such as Rana Sugars would be much more vulnerable to a reversal in the sugar cycle than frontline players which have the scale economies to weather a downturn. Apart from the less-than-bright outlook for the sugar business, the company's plans to diversify into unrelated areas, is also a damper.

The company proposes to set up a three-lakh-tonnes-per-annum steel plant and a 38-MW power plant at Jharsguda in Orissa with an expected outlay of Rs 430 crore. This would require a substantial increase in the current balance-sheet size.

Any equity expansion or debt contracted for this purpose could strain near-term earnings. Given that this represents a foray into an unrelated area, there is uncertainty about when the revenue and earnings streams from this project will materialise.

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