The Hindu Business Line : Basant Agro: Avoid

Investors can consider giving the rights offer of Basant Agro Industries a go-by. The stock trades at about eight times its trailing 12-month earnings on an expanded equity base. Though the offer is at a 30 per cent discount to the market price, a substantial expansion in the equity base is a damper. Earnings are unlikely to match the growth in equity as the company plans to use a large part of the proceeds to meet its burgeoning working capital requirements.

Businesses

Basant Agro's fertiliser business contributes 95 per cent of the revenues and 90 per cent of earnings. Apart from manufacturing single super phosphate (SSP) and sodium phosphorous potassium (NPK) mixture granulated fertilisers, the company also makes and sells hybrid seeds. Though the latter business has grown rapidly pace, it contributes only marginally to revenues. Basant Agro is among the smaller players in the fertiliser business. The fertiliser industry depends to a large extent on imported rock phosphate/phosphoric acid as indigenous supplies meet only a small part of the industry's requirements.

Concerns

To increase its revenues and profitability, Basant Agro has entered into a tie-up with Deepak Fertilisers to market its products in Maharashtra for three years.

Though this would contribute to revenue and earnings growth, it is unlikely to match the expansion in equity base.

Basant Agro's earnings are highly susceptible to regulatory policies with the Government fixing the maximum retail price of SSP and the subsidy thereon. Its low value-addition model, with raw material costs accounting for 80 per cent of operating expenditure, means thin margins.

With the Government keen on reducing its subsidy bill, it may not recalibrate the subsidy payable to manufacturers as frequently or adequately as warranted by increases in input costs.

As a consequence, the company may face further erosion of margins. Though the rights offer would enhance its debt-service ability, sluggish cash flow from operations, along with a high debt-equity ratio, is a cause for concern.

Objective

The company plans to use about Rs 9 crore of the rights offer proceeds to meet working capital requirements. Basant Agro also plans to expand the capacity of its SSP plant by 44 per cent to 1.2 lakh tonnes.

It proposes to convert unsecured loans from promoters, which were used for the recent acquisition of its NPK granulated fertiliser plant at Sangli, Maharashtra, towards their rights obligations.

Offer details

Basant Agro is offering rights shares on 3:2 basis at Rs 25 each. Keynote Corporate Services is the manager to the offer and Sharex Dynamic the registrar. The offer that opened on August 24 closes on September 8.

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