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S. Vaidya Nathan

SHAREHOLDERS of Hindustan Powerplus could sell their shares in the open market at the current price of about Rs 100. They could refrain from participating in the reverse book-building offer.

The Caterpillar group of US — owner of Hindustan Powerplus with a 91.9 per cent stake — plans to delist the stock. The floor price that it has indicated in the offer document is Rs 66. It has also stated in the offer document that it has the right to reject shares that are offered at a higher price.

In our view, Caterpillar may be willing to pay a modest premium over the floor price so that its plans to delist do not drag on further. But it may not be willing to pay a price that is higher than band of Rs 90-100 in which the stock has traded over the past couple of months. In this backdrop, investors should capitalise on the firm price trend and sell their holdings. The offer, which opens on May 2, closes for bidding on May 6.

The stock has traded at above the floor price level since February this year and risen by about 35 per cent over the past two months. This spurt seems to be driven by expectation of a higher exit price through the bidding process. It does not appear to be linked to fundamentals. The stock trades at a price-earnings multiple of about 40 times its likely per share earnings for FY 05.

Hindustan Powerplus makes high-end engines and has a modest presence in the export market. In line with the sluggish industry environment, its revenues rose marginally between 1998 and 2002. As the outlook for the engineering sector improved during 2003, it managed to post a healthy growth in revenues over the past couple of years. Earnings have not kept pace and operating margins have remained in single-digits.

The company's performance also pales in comparison with the robust growth in revenues, operating profits and earnings of companies in the engineering sector over the past couple of years.

With rising input prices, it is unlikely to post earnings growth that would justify the rich valuation at the market price as well as the floor price. Floating stock will decline in the post-offer period and the stock price, too, could also exhibit a downward bias.

There is no certainty whether Caterpillar would make another offer to mop up any shares held by the public after this offer.

For a company with a floating stock of just 8 per cent, trading volumes have been at healthy levels. This may not continue in the post-offer period.

As there is only a limited prospect for appreciation from the present price level and dividend yield is also unattractive, remaining invested does not appear attractive. It may be a better strategy to switch to other stocks in the engineering space or just stay with the cash that you receive.

DSP Merrill Lynch is the manager for the offer; the contact person is Mr Avneesh Merchant (022-56328000). Shares must be tendered through the online auction system of the Bombay Stock Exchange (www.bseindia.com). Bids must be routed through IL&FS Investmart.

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