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S. Vaidya Nathan

SHAREHOLDERS can sell their holdings in Panyam Cement and in case they are unable to do so, accept the open offer on April 27. The stock trades at a premium of about 40 per cent to the open offer price of Rs 101.

The principal risk to our recommendation would be a takeover situation, in which case it may fetch a higher price. Yet, we believe that exiting the stock may be appropriate as trading volumes are low and erratic.

The non-promoter holding in the equity would also slip to less than 10 per cent, post-offer. This could lead to a further decline in liquidity levels. With a capacity of about one million tonne after the planned expansion (present capacity is 7.2 lakh tonnes), Panyam would remain a marginal player in the cement industry. As price levels in Andhra Pradesh have tended to remain low relative to other proximate cement markets, it would be tough for the company to affect a turnaround; this would be the case even after it completes efforts to improve key efficiency parameters.

The Andhra Pradesh market would continue to remain in surplus and this could act as an overhang on prices. The rising energy cost structure and interest outgo could take a toll on profitability.

The company had difficulty in operating its capacity at healthy levels due to problems in sourcing working capital. Rising input costs also affected the profitability of the engineering business.

In this backdrop, the bottomline of Panyam Cement is likely to be swept away by the losses. The company may be a potential candidate for takeover as it has rich reserves of limestone. If there is any development on this front, it could lead to a higher price for the stock.

The acquirers would also be in a stronger position to negotiate a deal, as they will hold about 90 per cent of the equity.

Background: Mr S. Sreedhar Reddy and persons acting in concert are making the open offer. They have picked up about 50 per cent through a preferential offer at Rs 100 per share. As this had led to a change in management, the open offer has been announced.

The offer price includes an interest element of Re 1 to compensate for the delay in completing legal formalities as required by the Takeover Code.

The lead manager is Sobhagya Capital Options. The offer closes on April 27. The open offer is for 2.79 lakh shares, which accounts for 20 per cent of the equity of Rs 14.2crore.

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