Since April 1998, as against a loss of 29 per cent in the BSE Sensex, the KFL scrip has posted a gain in excess of over 125 per cent to achieve its current price of Rs 290 (BSE, on October 20). What's more, during this period, the volumes, which have traditionally been quite low, have also looked up. What has been the cause of the unusual price rise in the KFL counter, especially when the market Index has performed poorly? It may be recalled that KFL had come out with a Rs 53.52 crore public issue of OFCDs in April 1997.

The proceeds of the issue were to part-finance the Rs 185 crore expansion ofcapacities from 6,900 tpa to 18,000 tpa in HDPE/PP ropes and twines, besides the diversification into the manufacture of speciality nets. The project, appraised twice by IDBI, was to be funded through the issue of Rs 111 crore OFCDs and Rs 65 crore term loans from IDBI, apart from internal accruals.

As per the terms of issue, each OFCD had a face value of Rs 200 and was issued at a discounted price of Rs 160. The tenor of the OFCD was 17 months. At the end of this period, each OFCD was convertible, at the option of the holder, into one equity share of KFL at a price calculated to yield a discount of 33.33 per cent on the average daily closing prices of KFL for the previous six months on BSE.

The maximum conversion price was, however, kept at Rs 200 a share. Out of the Rs 111 crore OFCD issue, the Indian promoters of KFL, the Agarwals, took up Rs 22.80 crore at face value. Another Rs 35 crore worth OFCDs was taken up at par by Daewoo Corporation, South Korea (Daewoo), which, incidentally, was the exclusivesupplier of the Rs 118 crore machinery for the project. Apart from the promoters, seven institutional investors led by UTI had taken up Rs 24.59 crore OFCDs on a firm allotment basis.

The public response to the offer was very lukewarm. KFL could mobilise only 1,050 valid applications. In fact, only 6.6 per cent of the net public offer of Rs 42.31 crore OFCDs was taken up by 1,042 public investors, while eight bulk investors, possibly underwriters to the issue, filling up the remaining 93.4 per cent of the issue. Quite evidently, the issue sailed through only with the help of large institutional investors.

At the time of its OFCD issue, the KFL scrip was quoting at a price of Rs 100 per share and the company's management was expecting the conversion price to be around Rs 100 per share. This, despite the promoters and the collaborators, Daewoo, had committed to convert their entire contribution of Rs 57.80 crore at the maximum conversion price of Rs 200 per share.

For KFL's Indian promoters and Daewoo,the effective conversion cost, inclusive of notional interest, worked out to about Rs 251 per share, as they had contributed Rs 200 per OFCD as against the public offer price of Rs 160.

Post-issue, the KFL scrip, which was ruling at less than Rs 130 in July 1997, shot up to Rs 187.50 in just seven trading sessions in August last year. This sudden spurt was attributed by the market to the ``buy'' recommendation of the erstwhile ``Big Bull''. The bull run, however, proved to be short-lived. The price came down to less than Rs 130 in November 1997.

Early this year, the scrip once again saw an upward swing, which appeared to be ``engineered'' after the management declared an unexpected gift of 35 per cent interim dividend! In the previous two years, the company had declared an interim dividend of only 10 per cent.

In fact, the financial performance of KFL in fiscal 1998 was none too impressive, though prima facie it appeared so. The company posted a net profit of Rs 25.08 crore for fiscal 1998 on aturnover of Rs 74.2 crore as against a net profit of Rs 17.13 crore on a turnover of Rs 52.7 crore in the previous year. However, fiscal 1998 accounts did not take into account interest on OFCDs relatable to the year amounting to Rs 7.08 crore.

Moreover, the company changed the method of charging depreciation from written down value to straight line method, resulting in an undercharge of Rs 6.92 crore. But for these accounting gimmicks, the net profit for fiscal 1998 would have actually been lower than the previous year!

Though the fiscal 1998 annual report mentions the installed capacity to be 18,000 tpa, it is not very clear if the company has indeed completed the expansion project. Disbursals by IDBI, which were envisaged at Rs 65 crore during 1998, have amounted to only about Rs 16 crore.

And, the working capital borrowings have come down during the year instead of going up to cope up with increased level of operations. More glaringly, the increase in fixed assets during fiscal 1998 have only beenRs 102 crore as against the Rs 147 crore projected in the offer document. The company's performance in the first quarter does reveal that the current fiscal might not be that impressive to warrant a big spurt in the share price.

With no quantum jump in EPS visualised in the current year, why should the price rise suddenly in defiance of market conditions? Well, the conversion of the OFCDs is due by mid-November. As per the terms of issue, the conversion price will depend on the average market price of KFL scrip over the last six months prior to the conversion. Which perhaps explains the northward journey of the scrip from April 1998 onwards.

Since May 1998, the scrip has been moving up on the back of unusually increasing volumes. In fact, in just 18 trading sessions between May 15 and June 9, the scrip more than doubled from Rs 153 to Rs 311, even as the market was stumbling due to the radiation effects of Pokhran nuclear tests.

Significantly, the average daily volume recorded during this period wasabout 20,000 shares. The trading volume on May 21 alone was a whopping 2,18,200 shares, which ought to be a record for the KFL counter. After moving back and forth, the scrip embarked on its upward surge more recently in September, recording gains of over 80 per cent to reach Rs 305 on October 15.

As a result of the sustained northward march of the KFL scrip, the lowest price during the last six months was Rs 149 recorded in May 1998. Consequently, the conversion price for OFCDs can now be kept at least at Rs 100 since the average price during the last six months would be clearly over Rs 150.

And, since the current price is clearly more than two-and-a-half times the conversion price, it provides enough incentive for the OFCD holders to seek conversion. The recent pattern of trading in the KFL counter suggests the presence of an invisible hand, which appears to have tried to lift the threshold price of KFL in order to induce the OFCD holders to opt for conversion. Significantly, the bulk of the OFCDs arein the hands of institutions. Only time will tell if the institutional OFCD holders would fall for the oldest trick in the book.

Arranged by INVESTAR -- The Aarthik News & Research Syndicate