News reports indicate that Mangalam Cement's Rs 14.87-crore rights issue of 14 per cent optionally convertible cumulative preference shares (OCCPS) has bombed. The company has not been doing too well during the last few years and it has shown losses of Rs 11.35 crore and Rs 28.69 crore in 1996-97 and 1997-98 respectively. Its stock has been trading at around Rs 7 per share on the bourses.

By subscribing to the rights offer, the shareholder would have got one OCCPS for every equity share held at Rs 10 per OCCPS. These OCCPS would have carried a preference dividend rate of 14 per cent and the shareholder would have had the option to convert them into equity shares of Rs 10 each on the expiry of the third, fourth and the fifth year from the date of allotment. Considering the on-going recession in the economy and more importantly, the excess production capacity in Rajasthan and adjoining regions, it is unlikely that the company will post adequate profits to be able to declare dividends.Further, with profitability likely to be depressed for a long time to come, there is little hope of any significant capital appreciation.

The proceeds of the issue would have been utilised for making payment to the financial institutions on account of overdue interest on term loans and to make part-payments of ICDs. The company is in default to IDBI towards principal repayment for Rs 9.53 crore and towards interest payment for Rs 6.52 crore. It owes Rs 6.15 crore towards principal repayment and Rs 3.15 crore towards interest payment to ICICI and Rs 4.43 crore towards principal repayment and Rs 3.43 crore towards interest payment to other institutions. The payment of overdue interest and part-payment of ICDs would not improve the company's future prospects in a significant way.

To tide over the losses, the company's directors had begun exploring the possibility of leasing or letting out of its manufacturing facilities. A consortium of group companies was expected to bring in the necessary capital tostrengthen the working operation and financial base of the company. However, expecting better cement prices in the year, this proposal was dropped in favour of a rights issue. With the rights issue having bombed, a sale or a lease-out of Mangalam Cement's plants should be re-considered.

Brand valuation

Brand valuation is the simplest route to high P/E. At least that is the impression one gets considering the number of companies that have started valuing their brands. Investors are unnecessarily bombarded with excessive information, which is of little use to them. Reconciliation of accounts with the US GAAP is one example. Very few companies like Great Eastern, Dr Reddy's and Infosys give information that is really useful to the shareholder. On the other hand, BPL has rewritten an age-old financial priciple -- equity is costlier than debt -- to value its brand. If the management of BPL is to be believed, cost of debt and equity is the same.

To calculate the brand multiple, the BPL management hascalculated its cost of debt to be 5.77 per cent and has assumed the cost of equity to be the same. On dividing it with 100, one arrives at one of the brand multiples (BPL has considered two multiples to arrive at the range) of 17.33. Incidentally, for calculating the EVA, the cost of equity has been considered at 21.56 per cent (approximately 2 percentage points higher than HLL's). BPL's debt equity ratio is 0.91:1. If the methodology of dividing 100 by cost of debt and equity is followed, the value of the brand works out to be Rs 420.45 crore-34 per cent lower than the lower of the two brand values calculated.

However, the management has clearly put a disclaimer that brand value is an academic exercise done by an independent research agency but unless the management agrees with its conclusion, it is under no compulsion to include it in the annual report. Another interesting point is that for the calculation of EVA, cost of debt has been taken at 10.42 per cent (pre-tax) and hence logically, post-tax costof debt is 6.77 per cent, one percentage point higher than cost of debt taken for calculating brand value. This will lower the higher brand value (using the same assumptions as considered in the exercise) by Rs 132.6 crore or 12 percentage points. Another company that has valued its corporate brand is Infosys. Here, the method of calculation of multiple applied for valuation is not disclosed.

However, the calculation of its non-brand income appears to be weird. It is simply 90 percent of "other income". This is strange because in the cash flow statement (for 1997-98), only Rs 1.11 crore or 41 percent of other income is considered as income from operating activities and for 1996-97, non-operational income is considered to be Rs 3.48 crore. In other words, in both years, non-brand income is higher than what is disclosed in the cash flow statement as non-operational income. However, it should be clear that these (BPL and Infosys) are extreme cases.

Titan Industries

For Titan Industries, 1996-97 wasa disastorous year as far as working capital management was concerned and 1997-98 was a turnaround case.The inventory of finished goods was sharply lower by Rs 31.5 crore (increased by Rs 48.5 crore in 1996-97). The inventory management was reflected in the cash flows and despite increase in advances due to operational reasons, the company managed to generate cash from operations.

Though the company has not generated free cash and had to rely on fresh borrowings to meet repayment obligations, the quality of earnings is much better in 1997-98. Accounting for the fact that profit on sale of investments contributed Rs 10.13 crore in 1996-97. With improved performance of its jewellery division, Titan should start generating free cash flows from this year.

Emcee (With contributions from Sarad Saraf & Urmik Chhaya)