Tata Engineering (Telco), has announced its plans of having a rights issue to mop up close to Rs 13.8 bn for retiring high cost debt and funding future capex as well as developing new products ('Magna'). The company is paying an interest rate of around over 13% currently on its total debt.
Telco plans to issue convertible and non-convertible debentures with detachable warrants on a rights basis. This will be in the ratio of one convertible debenture and one non-convertible debenture for every 5 shares of the company and would thus result in a 20% dilution in the current share capital of the company.
The convertible portion is likely to have a face value of Rs 80 -100 each and carry an interest rate of 11%. These will be converted into one ordinary share of Rs 10 each on March 2002 at a premium of Rs 70-90 each.
The non-convertible portion will have a face value of Rs 100 each and will carry a coupon rate of 11%. These are likely to be redeemed in three installments of Rs 30, Rs 35 and Rs 35 each at the end of 4th, 5th and 6th year from the date of allotment.
Every two non-convertible debentures, will have one detachable equity warrant. The warrant can be exercised and converted into one ordinary share of Rs 10 each at a price of Rs 120-140 which is to be exercised after 18 months of the date of allotment. This, if exercised, will result in further dilution of the current share capital by 10% if all the warrants are exercised.
The company is doing this issue to reduce its cost of borrowing, fund its future capital expenditure and its negative cash flows.
The company is in a catch 22 situation whereby their main business commercial vehicles continue to slide downwards and there has been no positive news 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.
The impact of the rights issue is likely to be negative for the company, atleast in the short term, in the light that the future capital expenditure for product development in the car segment seems risky. This is due to the fact that the car division has not performed upto the mark yet. Besides the equity dilution keeping in mind the rising losses in Telco is also negative.
On the current price of Rs 105, Telco is trading at 37.5x FY00 EPS of Rs 2.8.
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