BSES proposes to dilute equity to fund its various projects. The dilution will be viewed negatively by the stock markets at least in the medium term. The stock closed at Rs 146.80 on June 16 on the BSE, down 2.35 per cent from the previous close, though the Sensex climbed by 120.2 points.

The management would have done better to sell some of its stake in its subsidiaries with the projects that have achieved financial closure, have their PPA signed and have state guarantees for the recovery of dues.

According to the management, the funds are not required for any specific project. BSES has been setting up far too many projects and some of these will not come up for at least couple of years. A case in point is the proposed 495mw project at Palghar which is at an early stage and will not require cash that cannot be generated internally, at least for a year.

This makes it difficult to understand why BSES needs to dilute equity. As stated earlier, the company can easily generate lot of cash ifit reduces its stake in two of its subsidiaries. The company could sell a minority stake in two of its subsidaries. The first is the wholly-owned BSES-Kerala Power, and the second, BSES-Andhra Power, in which the company owns 70 per cent stake.

Both the companies have obtained all the required clearances. BSES Andhra has signed the PPA and the FSA, has received environmental clearance, and has got a state government guarantee. The financial closure is almost over. The debt component is Rs 510 crore and equity is Rs 210 crore.

Not many power projects are at such an advanced stage and prospective investors would be willing to pay a good premium even for a minority stake in the company. With a 51 per cent holding, BSES will retain the controlling stake and, as such, it has nothing to lose. BSES Kerala Power (equity: Rs 34.5 crore) is equally well palced. The PPA with KSEB provides for recovery through LoC, escrow and state government guarantee.

The unit is expected to be operational in the combined cyclemode by June 1999. In this company too, BSES can divest up to 19 per cent and yet retain a controlling stake. The cash generated through divestment will at least partly meet the company's cash requirement.

With the Palghar project yet to go on stream and Ticapco (project in TN) yet to make any material progress, why does BSES want to double the capacity of Ticapco to 500mw and set up 4x250mw units with Damodar Valley Corporation? BSES will need a huge equity dilution to fund DVC as well as phase II of Ticapco. The gestation period of the projects is itself a disincentive for equity dilution. BSES needs to shun these projects and keep equity diilution (if still required) to a minimum by divesting stake in the two subsidiaries.

The projects undertaken by the subsidaries are excellent ones and will yield higher returns than its licencee business (through tax-free dividend). Sticking to fewer and better projects will maximise shareholder value.

If BSES reduces its stake to 51 per cent in both thesubsidiaries at Rs 20 per share, it will be able to garner Rs 115 crore. No company will consider a GDR/ADR for this amount but the equity dilution will be lesser to that extent. BSES needs to concentrate on its subsidiaries and the Palgarh project. As far as phase I of Ticapco is concerned, the company has little option but to carry on as work has already begun. These will require no equity dilution at least till the Palgarh project reaches the final stage of completion.

Aluminium stocks

Aluminium prices in the international markets have improved considerably in the last three months after touching a low of $1,140 per tonne in March. As a result of the improved international prices, domestic manufacturers such as Hindalco and Nalco have been able to revise their selling prices upwards. There have been concerns that international prices could begin to fall once again following reports that the price rise was artificially created. Though there have been minor hiccups during the last month, LME spotprices have been more or less steady at around $1,300 per tonne.

Even if international prices decline, the rupee depreciation would continue to provide a cushion to the domestic producers. Therefore, both Nalco and Hindalco are likely to show a significant improvement in their earnings in the current year.

Industry data for May show that while Hindalco has recorded a 3 per cent increase in production over the April figures, Nalco produced 8 per cent more. Hindalco's production stood at 20,722 tonnes, while Nalco produced 15,750 tonnes in May. Aluminium exports also appear to be picking up.

These encouraging data further bolster the belief that the worst is over for the domestic aluminium industry. Stock markets have taken cognizance of the fact and both the Hindalco and Nalco scrips have appreciated significantly during the last three months. Hindalco, which traded at around Rs 478 on April 16, closed at Rs 632 on June 15. Nalco's stock price has doubled to Rs 39 during the same period.

As Nalco'scapital restructuring is complete and its plants are operating at much higher capacity utilisation levels than the previous year, its stock prices are unlikely to face resistance during the next few months. As far as Hindalco is concerned, the uncertainty regarding the company's greenfield expansion in Orissa may pose a problem. There have been unconfirmed reports that the company has abandoned its Orissa project but the management is yet to make an official announcement to the effect. However, as stock markets are known to act on rumours and react on news, this could be a good time to buy Hindalco shares too.

Emcee (With contributions from Urmik Chhaya and Sarad Saraf)