The Hindu Business Line : Kirloskar Ferrous Industries: Avoid

Shareholders of Kirloskar Ferrous Industries can avoid subscribing to the rights offer being made at Rs 35 per share. A chunk of the offer proceeds of Rs 227.5 crore is to be utilised towards redemption of preference shares of Rs 105 crore, acquisition of casting division on slump sale basis from Kirloskar Oil Engines for Rs 21 crore, and the balance towards upgrading this division with additional equipment. In the secondary market, the stock is also trading marginally lower than the rights offer price.

While the demand from OEMs in the end-user segments such as automobile, tractor and diesel engine segments is likely to be strong in the coming years, the earnings expansion may not keep pace with the growth in equity base. Post-rights offer, the equity is set to nearly double and go up further with detachable warrant conversion at a later date.

The price-earnings multiple works out to over 10 times the per share earnings for 2005-06 on the existing equity base. This is much higher than some established peers in the steel sector.

Moreover, the contribution of the castings division being acquired from KOEL may not make a material difference to the company's overall financials in the near term.

For the year ended March 31, 2006, this division clocked revenues of Rs 67.3 crore and aided by high `other income', recorded post-tax earnings of Rs 2.1 crore.

Kirloskar Ferrous operates two divisions: Pig iron and castings. For the nine months ended December 31, 2006, the company reported revenues of Rs 351.2 crore and post-tax earnings of Rs 22.7 crore. On the operational front, the foundry with capacity utilisation of 54 per cent has room for improvement.

However, the pig iron capacity utilisation has been fairly good. In pig iron, it remains exposed to the vagaries of raw material prices namely, iron ore and coke.

On the demand front, while the auto majors are likely to generate a healthy order flow for the company, since the pricing power may also rest with the former, the potential for margin increases may be limited. The company also remains exposed to issues such as labour disputes, which has dogged them in the past.

Offer details: The rights offer is being made in the ratio of nine equity shares for every ten held. Apart the rights offer, the company is also issuing detachable warrants as a part of this offer on a 1:1 basis at Rs 35.

On conversion of warrants, the proceeds are to be utilised towards organic and inorganic growth opportunities including expansion of existing facilities, acquisitions or strategic partnerships.

The detachable warrants can be exercised between 12 months and 36 months from the date of allotment. Enam Financial is the lead manager to the offer. The offer opened on January 19 and closes on February 17.

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