The shares of Suzlon Energy Ltd plunged to near their 52-week low of Rs175 on the National Stock Exchange after the company announced that it would consider a rights issue to raise up to Rs1,800 crore. After the experience with Tata Motors Ltd and Hindalco Industries Ltd, both of whose shares have plummeted due to fears of high equity dilution, it seems like the markets don’t want anything to do with a company which is planning to raise equity capital in the current environment.
But Suzlon’s seems to be a slightly different story. To start with, the equity dilution won’t be as high as the other two companies. Assuming the new shares are offered at a 30% discount to current market price, the dilution will be about 9.5%. Also, Suzlon shares currently trade at Rs182, while in a report dated 2 September, Merrill Lynch assigned a value of about Rs140 per share to the company’s current stake in its overseas subsidiaries, Repower Systems AG and Hansen Transmissions International NV. Even if one were more conservative with estimates of the valuation of subsidiary companies, the parent company looks quite undervalued. One way to look at it is that the company’s raising equity capital when its shares are at their lowest, and hence dilution would be higher than normal. But given where valuations are currently, it doesn’t make sense for the markets to drum it down much further.
Suzlon had a setback earlier this year when it had to recall and retrofit blades of its S88 turbines at a cost of $25 million (Rs116 crore). As a result, the company’s order book hasn’t grown at the same pace as its competitors. While this has weighed the stock down, analysts expect the issue to be resolved soon and order booking to resume at normal levels.
Earlier this month, the company had announced that it will advance its purchase of Martifer’s 22.5% stake in Repower by about five months. This would cost about Rs1,750 crore, and it now seems the rights issue will fund the purchase. The assumption earlier was that the purchase would be funded by debt, but with credit markets tightening and borrowing costs mounting, equity funding seems to be the better option for the company. It also needs to be noted that Suzlon has large capital expenditure plans and by raising some equity now, it gains more flexibility with debt funding in future.
True, the incremental earnings from the additional 22.5% stake in Repower would far from make up for the estimated dilution of 8-9%. But also note that the stake purchase brings other benefits to the company, such as access to Repower’s superior technology and other synergy benefits. This can happen only after the company’s stake exceeds 75% in the company (it currently stands at 66%). What’s more, Suzlon’s recently expanded capacity for components can be used as a supply base for Repower. Since worldwide demand for wind energy is robust, thanks to high crude prices, Suzlon shares should find takers sooner than later.
Tea producers: current high prices may not sustain
Tea prices have risen almost 50% compared with the year-ago levels on an all-India average basis, data collated by the Tea Board of India until the first week of September show. Prices have risen by 41% in north India and by as much as 68% in the South.
Also See Demand-Driven (Graphic)
Domestic consumption is growing at 3.0-3.5% a year, while tea production between April and July this year has risen by 4.4%. Why then should domestic prices rise?
The world’s largest tea exporter, Kenya, has witnessed a sharp drop in production this year owing to political and ethnic violence in the country. This shortfall has been made up by other tea producing countries including India. More than 60% of this financial year’s incremental production in India has been exported, leading to meagre increase in domestic supply. In south India, 96% of the incremental production so far this financial year has been exported, which explains the tighter demand-supply situation and the higher jump in prices in that region.
Chairman of the Indian Tea Association Aditya Khaitan, who is also managing director of McLeod Russel India Ltd, has said the next season—from April 2009—will begin on a strong note in terms of tea prices. He expects both exports and domestic consumption to increase, and production to be stagnant, leading to a shortfall in supply.
But not everyone is convinced. As one industry analyst points out, if Kenyan production were to come back on track, the world demand-supply equation would alter dramatically. It’s too early to make predictions about the next year.
But this financial year will see tea producers make bumper profit. Almost all costs for a tea producer are fixed, and hence the incremental price will directly flow into the net profit. Much of the profit will be reflected in the September and December quarters, when tea sales are at their peak. Sales wear off during the January-March quarter, during which producers normally report losses. This year, losses, if any, during the quarter are also expected to be substantially lower.
Shares of tea companies such as Jay Shree Tea and Industries Ltd and Harrisons Malayalam Ltd have risen by around 50% since April because of the higher prices. At the same time, shares of Tata Tea Ltd have fallen 17% because it is one of the largest buyers of bulk tea, and may not be able to pass on the entire increase in prices to consumers. Investors who are excited about tea producers should also keep in mind that the prices may not sustain for long if Kenyan production returns to normal.
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