The Hindu Business Line : Ceat: Invest

SHAREHOLDERS can sell their holdings in the secondary market and subscribe to the rights offer. To cater to the long-term working capital requirements, automotive tyre major, Ceat, is raising Rs 52.7 crore through a rights offer in the ratio of three equity shares for every ten held. The offer is priced at Rs 50, a discount of 26 per cent in relation to the prevailing market price. The rights offer closes on January 27.

The company's performance has been far from encouraging in the recent quarters. Growing competitive pressures and rising input costs have taken a toll on the financials of almost all tyre companies, including Ceat. For the year-ended March 2005, the company had to contend with a loss of Rs 2.8 crore against a profit of Rs 22 crore for the previous year.

Apart from the spurt in raw material prices, the huge interest cost of Rs 64.2 crore was instrumental in pushing the company into the red. The trend this fiscal has not been encouraging either. For the six months ended September 2005, the losses mounted to about Rs 6 crore.

In this context, the proceeds of the rights offer would help the company lighten the interest burden. Ceat proposes to utilise the entire proceeds of the offer to meet the long-term working capital requirement. But for this factor, the scope for any significant improvement in performance appears limited. The price of crude oil continues to rule firm. This would, in turn, have an inflationary impact on cost of inputs such as carbon black, synthetic rubber and tyre cord.

Only a sustained growth in demand from the replacement tyre market would have a positive impact on the industry fundamentals. The robust trend in automobile production in the recent years, along with the improved economic fundamentals, justifies a case for increased demand from the replacement market.

Though it would take time for the positive impact of these developments to pan out, the company's performance is likely to remain lacklustre in the near term. Ceat is reorienting its product mix in favour of higher value-added products. The performance could improve provided it succeeds in its initiatives.

For the moment, there is no incentive for the shareholders to enhance their stake by subscribing to the rights offer. It would, however, be prudent to capitalise on the 26 per cent price discount of the rights offer by selling the existing stake in the secondary market and subscribing to the rights entitlement. Otherwise, there appears to be limited scope for any significant capital appreciation from an equity investment in the company.

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