Orbit Corporation (Orbit) has announced that pursuant to shareholders’ approval for the proposed qualified institutional placement (QIP) of up to Rs500 crore, the authorised directors committee of the company has closed the bid period for the QIP and approved the QIP for Rs145 crore (issuance of 78.4 lakh shares at Rs185 per share).
The funds raised from the QIP would be used partly to fund the ongoing projects and partly to finance the acquisition of new re-development properties in south Mumbai.
The QIP has marginally reduced the concern with regard to Orbit’s high leverage position. After the QIP, Orbit’s debt-to-equity ratio is likely to come down to 1.0x from 1.3x reported in Q1FY2010.
However, the QIP is likely to expand Orbit’s fully diluted equity base by 17.3% to 5.3 crore shares.
In terms of earnings, the sharp dilution in the earnings from the expansion in the equity base is likely to be partially offset by the interest savings on the debt to be repayed (assuming debt repayment of Rs100 crore).
Consequently, we expect the earnings to get diluted by ~7-8%. Hence, the equity dilution is likely to remain an overhang on the stock in the near term.
In its recent management commentary, Orbit allayed the concern related to its performance in terms of sales volumes. The funds raised through the QIP are also likely to marginally reduce the concern over the company’s high leverage position.
However, this QIP is likely to result in an earnings dilution and is likely to remain an overhang on the stock in the near term.
Hence, we maintain our HOLD recommendation on the stock with the price target of Rs208. At the current market price, the stock is trading at 8.6x FY2011 earnings estimate and 1.1x FY2011 price/book value.