The Hindu Business Line : The Dhampur Sugar Mills: Avoid

SHAREHOLDERS, especially those with a low risk appetite, may be better off staying away from the rights offer being made by the Dhampur Sugar Mills (DSM). The company has been reporting net losses for the past five financial years and has accumulated a significant debt burden. The current rights offer is being made to infuse some equity funds as a pre-requisite to a corporate debt restructuring exercise, which the company has negotiated with its institutional lenders.

What the offer document says

The rights offer, in the ratio of 4 for every 13 shares held, is being made at Rs 10 per share. It proposes to raise Rs 8.09 crore and will expand DSM's equity base to Rs 34.5 crore.

The rights offer proceeds will be used as working capital, and will meet the pre-requisite of equity infusion, for the corporate debt restructuring exercise negotiated with lenders.

The company has been making net losses over the past five years, due to low sugar prices and high inventories, which has led to a high debt burden. The debt:equity ratio stands at 4.3:1 before the rights offer and will improve to 3.6:1 post-offer.

The debt restructuring exercise, which was approved by some of the key lenders, envisages a re-setting of interest rates on term loans at 0.5 per cent over the Prime Lending Rate, waiver of compound interest and penalty on outstanding term loans, and a rescheduling of the redemption dates for preference shares. Sale of assets is also to be used to raise funds. In the meantime, the company has received fresh term loans for Rs 30 crore from PNB and Bank of Baroda.

Recommendation

Investors may stay away from the rights offer due to the following reasons:

Proceeds from this offer, amounting to Rs 8 crore, will make only a marginal difference to the company's overall debt position, which stood at Rs 353 crore on the previous balance-sheet date. Thus, an improvement in the company's profitability position hinges to a large extent on the quick implementation of the debt restructuring exercise. Though the restructuring proposal has been approved by key lenders, the company has not made much progress on some of the key aspects of the exercise, such as asset sales.

Though the debt restructuring exercise could alleviate the company's debt burden, it may not immediately lead to robust earnings for DSM at the per share level. The recent government package enabling sugar producers to meet cane price shortfalls and the strengthening in open market prices may help bolster the company's profitability this fiscal. But problems such as high inventories, rising cane prices and delay in payments of power dues by the UP Government, persist and will need to be sorted out, before the company reports a sustainable turnaround in its operations. The cyclicality of the sugar business also adds to these uncertainties.

Substantial shortfalls in DSM's financial performance, against projections made in its previous rights, offer a history of significant investments/loans to loss-making group companies and a long list of contingent liabilities and dues, which are not reflected in the balance-sheet, add to the risks and uncertainties associated with DSM's prospects.

The company's practice of taking frequent recourse to the capital markets over the past decade, acts as a damper to the market perception of the stock.

The DSM stock has seen a sharp run-up in recent months and now trades at Rs 17 levels. However, to subscribe to the rights offer in the hope of cashing in on short-term gains, may involve significant risk. The spurt in stock price may prove to be short-lived, if the financial performance does not measure up to expectations. Also, with the shares likely to be listed on a partly paid basis to start with, shareholders may not be in a position to cash in on the recent buoyancy in the stock, immediately after closure of the offer.

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