Pantaloon Retail: Perfect fit

Pantaloon Retail has a history of issuing fresh equity well below market rates.

In most cases earlier, promoters have been beneficiaries of such issuances, having picked up shares much lower than market rates through preferential issues, and conversion of warrants and debentures.

For a change, minority investors, too, are benefiting from an issue being made by the company that is lower than the market price.

Pantaloon on Thursday announced a 1:5 rights issue at Rs 500 a share, which is an over 70 per cent discount to the stock's current price of Rs 1,700.

The stock markets weren't pleased with the move, which is reflected in the 3 per cent drop in the stock after the announcement.

But the fact that the rights price is much lower than the market rate is not a negative for shareholders.

Rather, it's an equitable way of rewarding shareholders who have stayed with the company, as they would be able to acquire shares at a lower-than-market rate.

While the equity dilution is 20 per cent, the stock would not correct correspondingly by 20 per cent simply because of the capital worth Rs 224 crore that would be infused into the company.

For an investment in the rights issue to make sense, the stock should trade at over Rs 1,500, or 11.8 per cent lower than current levels, after the adjustment in the stock price post the rights issue.

Given Pantaloon's current valuations of over 50 times forward earnings, however, there is the risk that current price levels would not sustain for long.

Investors, therefore, would do well to sell their rights, rather than opt to acquire more shares at current levels.

Jindal Saw

The board of Jindal Saw recently approved the raising of FII investment limit in the company to 49 per cent from 24 percent. At the end of the June quarter, total foreign shareholding stood at 31.21 per cent, of which foreign promoters held 9.5 per cent.

Since non-promoter foreign holding was about 22 per cent, the hike in the limit from 24 per cent would help. Likewise, the Jindal Saw stock has gained about 3.2 per cent since the announcement was made on Monday.

However, even prior to the announcement, investor interest in this company has been quite strong. In the past two months, the stock has gained about 14 per cent compared with a 7 per cent rise in the broader market.

Jindal Saw supplies submerged arc welded pipes to user industries such as the oil and gas sector. The upturn for the company's key customers has led to a significant improvement in performance of the company.

Jindal Saw reported a 273 per cent growth in its net profit to Rs 30.01 crore in the June quarter, riding mainly on the back of a 176 per cent growth in its net sales.

Operating profit margin expanded merely 40 basis points to 12.91 per cent, largely owing to a 1221 basis points growth in raw materials expenses to 69.28 per cent of net sales.

In fact, high steel prices had led to a drop in margins in the previous two quarters. Steel prices are expected to rise marginally over the next few weeks.

However, strong pressure on the company's margins owing to higher input costs has shown signs of easing, as steel prices are lower on a y-o-y basis.

Gujarat Ambuja Cement

Gujarat Ambuja Cement (GACL) has acquired a 14.87 per cent stake in ING Vysya Life Insurance Company.

With this, the company has joined several other players such as ICICI Bank, Indian Rayon, Bajaj Auto and Exide which have also entered insurance thanks to the opportunity created by extremely low level of insurance penetration in the country.

In fact, Exide had purchased a 49.13 per cent stake in the same company for Rs 203 crore. Using this valuation, Gujarat Ambuja could have paid around Rs 60 crore for its investment.

The company's senior management has pointed out that the cash on its books at the end of June quarter amounted to approximately Rs 250 crore, which could be utilised for financing its new line of business.

The company had earlier ventured outside the cement business via its subsidiaries GACL Finance and GGL Hotel and Resort Company.

However, these subsidiaries are quite small and the equity investment of the company in these ventures is just Rs 22.4 crore.

Also, according to the company, synergies between its insurance and finance subsidiaries are not very likely.

In CY04, ING Vysya's premium income grew 312 per cent to Rs 151 crore. But in terms of profit, analysts highlight that the insurance business will not add substantially to GACL's bottomline in the short term, given the long gestation period in this business.

The investment, clearly, is keeping in mind the long term growth potential of insurance. Further, companies which have forayed into insurance have enjoyed higher valuations on the street and shareholders of GACL would be hoping for an encore.

With contributions from Mobis Philipose and Amriteshwar Mathur