The issue proceeds will be used to convert Cosmo Film's loan funds to Cosmo Ferrites into equity. However, as the funds are interest-free, there will be no direct benefit to the company. Interest cost, which has been Cosmo Ferrites' Achilles Heel, will not come down post-rights. The rights issue is merely a pre-cursor to the conversion of institutional debt into equity (the main objective of the recast).

``The institutional lenders were keen that the promoters convert their loans into equity before they followed suit. Hence, the rights issue,'' says a senior company official.

With Cosmo Ferrites' trading at Rs 5.25 on the Mumbai Stock Exhange, at a 42 per cent discount to the rights offer price of Rs 10 per share, the response from the public shareholders is not likely to be enthusiastic.

``We expect a large renunciation, but does not bother us as the promoters will acquire the unsubscribed portion of the issue,'' says the official, adding that this will result in the promoters' stake going up substantially from the current 67 per cent. Once the promoters' convert their debt into equity, the FIs will follow suit, leading to a major reduction in interest costs.

Cosmo Ferrites has been impacted adversely by the rising interest burden. In 1998-99, interest outgo as a percentage of total expenditure was high at 33 per cent. Although Cosmo Ferrites had an operating profit of Rs 3.14 crore, the interest burden of Rs 5.45 crore resulted in a net loss of Rs 4.94 crore.The on-going financial restructuring is aimed at reducing the company's ebt. As of March 31, 1999, Cosmo Ferrites' long-term debt-equity was 4.72.

Thanks to frequent loans to finance expansions, interest cost has eaten into Cosmo Ferrite's bottomline. Reserves have been wiped out and the company now has an accumulated loss of Rs 1.3 crore. Notes the official, ``We have initiated a series of measures to improve leverage and hope to back in the black soon.'' ICICI has reportedly converted loans amounting to Rs 6 crore into preference shares.

Cosmo Ferrites' losses are a matter of concern because the colour TV sector, which is the main user industry, is thriving. Analysts expect the sector to grow at over 25 per cent in the current fiscal. Company officials say the low level of indigenisation among the MNC players in the CTV market and the poor performance by the domestic players have affected Cosmo Ferrites' finances. ``Even then, we have seen a 10 per cent plus growth in FY 1999 and Q1 2000 sales.

We are striving towards improving our market share in India as well as exploring business opportunities abroad. However, as the prices of electronic inputs are falling in the international and domestic market, our operating margins are under pressure. We have expanded our capacities in order to play the volume gain,'' said the official, adding that the company could stage a turnaround in this fiscal itself. In the first-quarter of FY 2000, Cosmo Ferrites incurred a net loss of Rs 1.27 crore on a turnover of Rs 4.93 crore.