Who says the current market price is the sole criteria for pricing a rights issue? If the shares are hardly traded on bourses, there is ample scope for charging a premium! Beardsell Ltd is case in point. According to the issue prospectus, the scrip was traded on November 26, 1996, at Rs 32. In the following three months, the scrip was not traded on the bourse at all. On May 12, 1997, one trade (of 50 shares) was transacted in the scrip at Rs 32. Undeterred by the lack of enthusiasm in its in scrip, the company is tapping its shareholders with a Rs 6.05-crore issue at Rs 20 in the ratio of two equity for every shares held.

Beardsell justifies the premium of Rs 10 on financial grounds like EPS, P/E, RONW, book-value and the consistent dividend paying record. During 1995-96, on a low equity base of Rs 1.51 crore, EPS was only Rs 8.48. After the issue, the equity will increase rise to Rs 4.54 crore and to maintain the same EPS of Rs 8.48, return on networth should be as high as 29.83 per cent. As the company has not made any profitability projections, it is difficult to assess the future prospects. Any capital appreciation in the short-to-medium term seems a remote possibility. Moreover, the share is listed on only one stock exchange, which does not guarantee enough liquidity.

Promoted by Nava Bharat Ferro Alloys Ltd, Beardsell manufactures expanded polystyrene products with an annual capacity of 1,152 tpa. The company's products are sold under the bradname Metoplast and Thermofrost. Capacity utilisation has been rising since 1992. Fiscal 1995-96 is an exception as capacity utilisation fell to 85 per cent from 90 per cent in the previous year. The company now proposes to modernise its existing plants, install 12 automotive shape moulding machines and acquire one more machine to manufacture disposable cups with an annual capacity of 54 million. The project cost, estimated at Rs 6.05 crore, is not appraised by any bank or financial institution. However, of the total project cost of Rs 6.05 crore, the asset creation is only to the tune of Rs 1.5 crore. As a major portion of the Rs 4.12 crore is earmarked for the company's working capital requirement, future returns will be low. The entire project cost will be financed through the rights issue proceeds.

A large chunk of the company's turnover accrues from trading income. The company recorded an income of Rs 36.88 crore (manufacturing income of Rs 11.52 crore and trading income of Rs 23.13 crore), Rs 49.61 crore (manufacturing income of Rs 16.29 crore and trading income of Rs 31.89 crore) and Rs 53.13 crore (manufacturing income of Rs 18.13 crore and trading income of Rs 32.98 crore) in fiscal 1993-94, 1994-95 and 1995-96, respectively. Net profit of the company stood at Rs 63.57 lakh, Rs 1.17 crore and 1.28 crore for the respective periods. The company has been operating at low profit margins and RONW for the respective periods work out to 14.23 per cent, 31.34 per cent and 18.72 per cent.

The company faces competition from small and medium-scale players. The full benefit of modernisation and expansion will not be reflected in the current fiscal as the project is expected to go on stream by the year-end.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.