The Hindu Business Line : AP Paper: Avoid

SHAREHOLDERS can skip the rights offer of The Andhra Pradesh Paper Mills, as the scope for appreciation may be limited. This recommendation is despite the fairly impressive track record of the company in a highly cyclical industry.

The substantial expansion in debt, the doubling of the equity base and the high degree of uncertainty about the price trends in the industry between 2007 and 2009 (bullish phase tends to be short in the industry) make us sceptical about the offer; price trends in this period would be crucial to the payoffs, as the expanded facilities are to be commissioned in March 2007. The rights offer is priced at Rs 95 per share. The stock trades at about Rs 105. The pricing at close to the market price also leaves no cushion on the downside.

The opportunity cost of tying funds in the rights offer should also act as a deterrent, as investors would have to forego more attractive investment opportunities.

The company plans to expand its facilities by about 25 per cent to 1,95,000 tonnes.

The expansion and proposed modernisation facilities would improve profitability parameters. In this backdrop, the stock could be tracked for potential investment at a later date. The rights offer is in the ratio of one share for every one held. The equity base will rise to Rs 23.8 crore. The lead manager is IL & FS Investsmart.

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