Hindalco rights issue: with long-term promise

Abhay Rao
Posted: Sunday, Oct 05, 2008 at 0122 hrs IST
Updated: Sunday, Oct 05, 2008 at 0122 hrs IST

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: be repaid are so large that they have had little option but to come out with a rights issue. While the current debt-equity ratio stands at 65:35, since this issue will result in a 42.8% dilution in liquidity, the debt-equity ratio will move to 45:55. While, having lower debt is always considered better, especially in present economic conditions, the company may have to dilute their equity than taking more debt, due to uncertainty in being able to repay. However, with Hindalco’s financial stability over the years that seems hard to believe, this move will however for the short to medium run dent the companies EPS. While the current market price is only a few rupees more than the issue price, this is mainly due to falling prices amidst uncertain commodity price stability as well as the overall economic condition. However if one were to take the companies average between their 52 week high and low, one can safely estimate a fair value of the share to be Rs. 140/share. Given this the company is offering the rights issue at a reasonable price, however many people have doubts on the subscription of this issue due to weak market sentiments and uncertain commodity prices. However most reports indicate that aluminum prices should pick up once we ride out this storm hopefully by the financial years 2010 and 2011. Also, with plans to invest almost Rs. 19,800 crore in the next three years to increase their production in different locations, the long run still looks good. By this time Novelis’s fixed income sale commitments would also be completed, giving Hindalco a fresh start....

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