The Hindu Business Line : BhagwatiAutocast: Avoid

Shareholders can avoid the Bhagwati Autocast rights, though it is being offered at a substantial discount to the market price, as the risks are high. Substantial earnings volatility across business cycles, the lack of an export market to fuel growth and the company's inability to meet expectations from its last rights offer increase the risks involved.

Bhagwati expects to raise Rs 2.56 crore from the rights issue to fund the construction of an additional factory building, modernise machine moulding casting facilities, set up an additional facility for the existing hand moulding division, and for long-term working capital.

The company has made two rights issues earlier in 1985 and 1993.

The rights offer, if subscribed fully, will expand the equity substantially. The rights offer of four shares for every five held expands the equity by 80 per cent. The proposed project will not expand the manufacturing capacity, but will only help increase the production efficiency and capacity utilisation. The current capacity utilisation is 80 per cent and the management expects it to rise to 85 per cent in FY-06 and 96 per cent by FY-07 due to the proposed investment. The growth prospects beyond FY-07 do not look bright, as the capacity would near saturation levels by that time.

The high interest costs, which accounted for 48 per cent of the operating profit for the six months ended September 2005, and the low margins in the casting business, expose the company to earnings fluctuations. The highly competitive market gives it little flexibility in pricing and, hence, margins are likely to be under pressure. A concentrated client profile enhances the risks.

The company is not well-equipped to handle a downturn. It reported losses in four out of the five years since 2001 and became a potential sick company in 2003. It has paid dividend for only two years in the last 10.

The company makes castings primarily for the tractor industry and has two major clients — Punjab Tractors and Escorts — which account for close to 75 per cent of the turnover. It recently commissioned hand moulding plant for supplies to the general engineering segment, which constitutes 25 per cent of revenues.

The company expects to diversify its revenue profile further by increasing supplies to the engineering sector.

The rights offer at Rs 20 per share is priced at 4.5 times the annualised September 2005 per share earnings.

The stock is, however, expensively valued at the current market price of Rs 38.

The offer closes on March 2, 2006. Vivro Financial Services is the lead manager to the offer. If the offer is fully subscribed, the company will be issuing 12.8-lakh additional shares.

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