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S. Vaidya Nathan

SHAREHOLDERS of Chettinad Cement can cut exposures in the stock as the prospect of a further equity expansion looms. However, even the infusion of further equity is unlikely to make a major dent in its debt burden.

If the plans for a rights offer go through, it would be the second such in 2003 and third over the past three years.

The debt levels were about Rs 350 crore in late 2002, and have declined only modestly, despite the infusion of equity.

The improvement in cement price levels in the Tamil Nadu and Kerala markets have enabled the company report better profits in the April-June quarter. Interest costs have also been reined in by about 20 per cent, possibly due to the re-pricing of its debt.

These factors point to a better showing in 2003-04 after a liberal splash of red in the previous year.

Compared to its competitors such as Dalmia Cement and Madras Cement in the Tamil Nadu and Kerala markets, Chettinad Cement is on a weaker wicket. Players such as ACC, Grasim and Larsen and Toubro have also been targeting these markets, which are characterised by oversupply.

In a situation where competition is intensifying, the company's fortunes would hinge largely on how quickly it manages to correct its debt burden.

At the time of the rights offer in early 2003, debt was at about 3.5 times shareholder funds. Much of this was accumulated when Chettinad Cement more than doubled its capacity to 1.5 million tonnes.

But the commissioning of new capacities coincided with weak prick trends, sluggish demand growth and additional fiscal imposts. This led to problems in servicing the debt burden.

From a long-term perspective, as the markets become increasingly volume- driven with lower margins, companies with small capacities are bound to come under pressure.

Its proximity to the Tamil Nadu and Kerala markets (where prices rule at higher levels as compared to other southern markets) provides Chettinad Cement with some breathing space in facing up to more competitive market conditions.

The possibility of it becoming a part of the consolidation process in the industry cannot be ruled out, especially as it offers a good entry point to the southern markets.

The promoters' holding in the equity is about 76 per cent and may edge up further if the indicated rights offer is under-subscribed. But it may not be advisable to stay invested in the stock.

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