Kesoram Industries’ Rights Issue To Be A Value Destroyer

Kesoram Industries is offering fresh equity shares through a rights issue. The issue opened on June 3, 2013 and will close on June 17, 2013. Earlier, May 16, 2013 had been fixed as the record date for determining the names of those shareholders who will be entitled to and offered shares on a rights basis as proposed by the company's board. The stock was trading at Rs 71.90 today.

The issue comprises 64,037,512 equity shares of face value Rs 10 each, and is offering at a price of Rs 65 per equity share with a premium of Rs 55 per equity share. The issue price is 6.5x the face value of the equity share. The company intends to raise more than Rs 416 crore from this rights issue. The applicants will be allotted in the ratio of seven equity shares for every five held as on the record date.

Kesoram Industries has two main businesses, viz. tyre manufacturing and cement manufacturing. It markets tyres under the brand names ‘Birla Tyres’ and its cement products are marketed under the brand names ‘Birla Shakti’ and ‘Vasavadatta Cement’. In addition, it also has some manufacturing activity for viscose rayon, filament yarn and transparent paper. The tyre, cement and rayon (including transparent paper and chemicals) business operations contributed 59.3%, 35.2% and 5.5% respectively of its total revenues for the year ended March 31, 2013. As of March 31, 2013, the company has a network of more than 8831 tyre dealers and 1544 cement dealers predominantly located in Karnataka, Andhra Pradesh and Maharashtra.

Kesoram Industries has been consistently posting net losses for the last 3 financial years. For FY2013, the company's net loss stood at Rs 329.23 crore. The tyre and cement manufacturer has constantly availed incremental loans for the last 5 financial years and has Rs 4405 crore as the total debt on its books as of March 31, 2013. However, it is now planning to repay some of its loans, which amounts to less than 10% of its total debt. Hence, after this repayment the extent of interest saving will be restricted and minimal in the coming years. As against this, the company is diluting its equity to 2.4x its existing equity base for this whole exercise.

We strongly feel that the company's stock price will correct considerably due to this planned equity dilution. Considering Kesoram Industries’ financial history, the ongoing rights issue, if fully subscribed, will end up destroying value for shareholders in the future. We advise investors to steer clear of this issue and square off their existing positions if they hold any.