Kemrock Industries>> Dilution effect

The Vadodara-based manufacturer of composite plastics and products, Kemrock Industries, recently announced its board approval for Rs 400 crore of preferential issue of equity shares and issued 16 lakh equity warrants to a strategic investor. The warrants were issued at Rs 90 each at 25% of the issue price of the equity shares. The rest 75% will become payable over the next 18 months on conversion of the warrants.

Earlier in May ‘08, the company allotted 4.6 lakh shares and 3.93 lakh warrants to the same strategic investor, RPM International, at Rs 650 each on a preferential basis. RPM International, a US-based manufacturer of paints and sealants, currently holds 15.85 lakh equity shares or 14.4% of the equity of the company. Assuming a full conversion of the recently issued 16 lakh warrants, RPM will become the second largest shareholder in the company after the promoter and managing director Mr. Kalpesh Patel. However, crossing the 15% holding limit will trigger an automatic open offer for the company, which can make it the largest shareholder of the company.

Kemrock’s performance on the bourses has been spectacular in ‘09 so far despite a forgettable ‘08. In ‘08, the company suffered from weak earnings performance that impacted its valuations. The company, which was trading at over 45 times its profits at the start of ‘08, was being valued at just 5 times the profits by the year end.

During ‘09, Kemrock’s valuation improved swiftly despite a continuing stagnancy in its profit growth. Currently, the company’s market capitalisation is twoand-a-half times that at the start of the year. However, this is mainly due to doubling of the P/E multiple of 11, as its per share earnings grew merely 10%.

The company has also diluted its equity periodically, which has impacted the per share earnings. Between December ‘07 and December ‘09 the equity has expanded nearly 46% from Rs 7.55 crore to Rs 11.01 crore. This is just the paid-up equity without considering outstanding warrants that can be converted into equity shares at the option of the holder.

Considering the company’s successive equity dilutions, retail shareholders are unlikely to benefit from any future earnings growth by the company.
via: E.T