Bajaj Hindusthan Ltd’s announcement of a rights issue at a price of 36 a share, or a discount of 33% to the prevailing price, cheered investors initially. The stock gained about 3% intraday on Tuesday.

But the company’s shares could not hold on to these gains, and ended the day down by about 1.9%. Some of this could be attributed to the drop in the markets in the latter half of the trading session. But shareholders may have also baulked at the forthcoming equity dilution.

The rights issue was a known event and also that Bajaj Hindusthan intends to raise up to 2,000 crore through equity funding. The company plans to raise about 1,644 crore through this issue, and the steep discount means it will sell two shares for each held to raise this amount. The discount will result in its equity base tripling to 68.5 crore. While equity dilution is a given in such a situation, the extent may appear a little more than expected.

As of 31 March, the company’s consolidated balance sheet had a debt of 7,715 crore and its debt-to-equity ratio was 2.5:1. This will come down after the issue. Repaying part of its debt will also lower its interest costs. In future, a lower debt-to-equity ratio gives the company leeway to raise more debt finance, if needed, for its projects.

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The first phase of its power business should start contributing to performance in the year ending September 2012. Its mega-power projects are expected to go on stream in about five years. The focus in the near to medium term will, therefore, remain on the sugar business. Strong cash flows from it could give the company the ability to service debt comfortably.

In a few months, there will be more clarity on that front as the sugar season commences. Expectations are that sugar output will trend higher due to a better crop. Flat sugar prices have been a disappointment. But if procurement prices remain stable, then sugar mills could still make money through the sale of by-products. And if exports continue, producers could benefit from better realizations in international markets. But all of this is uncertain, as it depends on policy decisions by both the central and state governments.

The impending equity dilution does dampen sentiment, but investors will soon switch over to watching how the sugar season shapes up. That will play a bigger role in how the stock performs over the next few quarters.

Graphic by Sandeep Bhatnagar/Mint

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