Telco plans rights issue - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Telco plans rights issue

Jan 18, 2001

Telco is planning a rights issue of convertible debentures, non-convertible debentures or some equity related instrument. The decision to this effect is likely to be taken at its forthcoming board meeting on the 31st of January 2001.We feel that the company is likely to go in for a rights issue of equity shares as the debt option does not look feasible for it at this stage. Due to its bad performance in the both the commercial vehicles as well as passenger car segment, and keeping in mind its capex plans over the next three years, the company's debt to equity ratio is likely to soar. This will continue to put a pressure on the company's interest burden.

The company's debt to equity ratio which was at 1.0x FY00 is likely to go upto over 2.0x from FY01E onwards. Basically, the company has no option but to go in for the equity route even though it is the most expensive option in the longer run.

Debt to equity (x)
Capex (Rs m)- 3,300 1,800 2,000
Interest costs (Rs m) 4,401 4,874 5,579 5,469
Increase in debt (Rs m) (4,410) 17,895 1,150 1,257

We have assumed that the company will use a rights issue of shares, instead of any other funding option to fund its future capital expenditure requirements. Over the next three years, Telco, will generate a negative cash flow after taking into account its capex requirements. This negative cash flow works out to Rs 1.9 bn for the next three years. Assuming that the company undertakes a rights issue to the finance this and the issue is done at Rs 60 (premium Rs 50 and face value Rs 10) the company's equity base is likely to go up from the current shares outstanding of 255.9 m shares to 288 m shares an addition of 32 m shares. Though this could dilute returns to shareholders of Telco, the company has no choice as of now.

Alternatively, the company will use the proceeds of the rights issue to pay off its debt and hence reduce interest costs.

We feel the company has to raise funds also as there is no positive news yet on an equity tie-up for its car project. The company is under pressure as its breakeven target of 70,000 cars in the current year, is unachievable.

On the current price of Rs 91, Telco is trading at 32.5x FY00 EPS of Rs 2.8.

Equitymaster requests your view! Post a comment on "Telco plans rights issue". Click here!


More Views on News

Tata Motors' Stock in Focus as Company Meets Global Investors (Views On News)

Jun 8, 2021

Tata Motors' meeting with marquee investors comes on the back of poor earnings.

Tata Motors Shares Plunge After Reporting Surprise Loss in March Quarter (Views On News)

May 19, 2021

The company wrote off US$ 2bn due to its shakeup of Jaguar Land Rover and warned over the global chip shortage.

What's Behind Tata Motors' Hike in Car and UV Prices? (Views On News)

May 10, 2021

Tata Motors' plan to tackle rise in its raw material prices.

Mahindra & Mahindra Shares Surge on Bagging Contract for Defense Equipment (Views On News)

Jun 4, 2021

Mahindra & Mahindra has signed a contract with the Ministry of Defence.

Auto Sales Dampened in the Month of May. Will it Bounce Back? (Views On News)

Jun 2, 2021

Auto Industry's recovery slows in May due to the second covid wave.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 18, 2021 (Close)


  • Track your investment in TATA MOTORS with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks