Hindalco rights issue: What should one do?

Here is a verbatim transcript of Raja Rajeshwari 's comments on CNBC-TV18. Also see the accompanying video.

 

Hindalco 's right issue opens for subscription on September 22 and closes on October 10. The rights priced at Rs 96 per share, is in the ratio of three shares for every seven shares held, or 3:7. The flagship company of the Aditya Birla Group plans to raise Rs 5, 048 crore via the issue.

 

India's biggest aluminium maker is looking to re-finance the USD 3.03 billion bridge loan taken to buy Novelis. The bridge loan needs to be refinanced by November. The remaining money is to be financed through debt.

 

However, the market is concerned with the timing of issue. Investor sentiment is also weak. So, based on these factors, the issue may be undersubscribed due to current market conditions.

 

Hindalco Chairman Kumar Mangalam Birla has reassured shareholders that the issue is safe. "The right issue is priced attractively. Of the total offering, 90% has been underwritten. About 5I bankers will underwrite the issue."

 

How will the rights impact Hindalco's valuations?

The company's current debt-equity ratio stands at 65:35. The rights issue will result in a 42.8% equity dilution. A higher dilution will result in EPS downgrades. Post rights, the debt-equity ratio would improve to 45:55.

 

On expansion plans:

The company plans to invest nearly Rs 20,000 crore in the next three years. It plans to set up aluminium plants and augment capacities.

 

So, what is the outlook for the company?

The outlook for the company's copper business is weak due to declining treatment and refining margins. We expect aluminium prices to peak out and see the significant equity dilution on account of rights issue to be negative. Novelis' fixed price contracts will also impact profitability in the near-term.