Although DCW is offering equity shares at par, the issue does not look attractive considering the declining profit margins of the company and the falling domestic demand for its products. The company has been going through a bad patch with falling margins at both operational as well net levels. The company is offering equity shares at a price-earning multiple of 14.49 (based on the 1999-earnings) which seems to be high.

Importantly, the company is going in for the equity dilution for meeting its working capital requirements, which does not involve any capital investments. Post-rights, the paid up capital will increase from Rs 28.89 crore to Rs 34.67 crore. After the warrant conversion, the equity will see a further jump to Rs 40.45 crore. Nevertheless, the stock is currently trading close to the offer price of Rs 11. The company is issuing one detachable tradeable warrant along with each equity share. The conversion of the warrants will be after the end of 24 months and before the expiry of 60 months from the date of allotment. The warrant conversion price is fixed at Rs 10.

DCW manufactures soda ash, caustic soda and PVC which are bulk products and are price sensitive. There is an excess capacity in caustic soda industry which is further aggravated by the lowering of import duties. This has squeezed the profit margins of the company.

For fiscal 1999, the company's sales fell to Rs 348.72 crore from Rs 308.48 crore in fiscal 1998. Despite the fall in sales, the company has managed to record a higher operating profit of Rs 51.06 crore compared with Rs 48.51 crore in 1997-98, thanks to a sharp fall in expenditure from Rs 306.6 crore to Rs 263.74 crore. This has also seen its operating margins improve from 13.66 per cent to 16.22 per cent which is still low. Interest cost rose from Rs 28.12 crore to Rs 28.74 crore. However, depreciation cost shot up from Rs 17.36 crore to Rs 19.93 crore. As a result, net profit dipped from Rs 3.02 crore to Rs 2.32 crore.

The company is operating at a net profit margin of just 0.74 per cent. However, margins at net level improved to 1.13 per cent for the first six months of the current fiscal. For the six months ended September 30, 1999, the company recorded a net profit of Rs 2.06 crore on sales 179.47 crore. The company is projecting a sales figure of Rs 407.86 crore for fiscal 2000 which is a significant improvement over the previous fiscal's figure of Rs 308 crore. Interest cost is projected at Rs 26.75 crore and profit before tax at Rs 3.66 crore. Net profit is targeted at Rs 3.35 crore. On an expanded equity (post-rights), the future EPS works out to only 98 paise.

This discounts the offer price of Rs 10 by a multiple of 10.41.The company is also running the risk of facing major liabilities. The risk factor of the offer document highlights that lease period of 793.39 acres of land in Sahupuram has expired. Now, it is obligatory on the part of the company to purchase the land within six months. This may add to the woes of the company. The company is also facing a sales tax liability of Rs 14.65 crore and excise duty of Rs 5.11 crore.