• JANUARY 18, 2001

Telco plans rights issue

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.

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