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Reader Q: What’s with Suzlon Rights Issue?

I am one of those unlucky investors in Suzlon Energy who is stuck in it. Suzlon energy has come out with a rights issue which is priced @ Rs 63. At that time Suzlon was  trading at @ Rs 58. Today it closed at 83. My question is what can be their motive for a rights issue @ 63 given that it will not get subscribed at all. Is there some trick which I am missing.

Suzlon’s rights issue makes little sense. They are offering 2 shares for every 15 held, at Rs. 63 per share.

The share price hasn’t seen the 63 price point since May 2010. Volumes are down substantially, and the stock seems to have flattened out.

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Why would anyone buy the rights issue at all? Is this a way for the promoters to increase stake by buying at 63? (If no one subscribes, people who “oversubscribe” will get to buy more shares)

Interestingly, 70% of the promoter shareholding is pledged against loans.

Results were horrible. Last full year EPS was negative: –6.39 per share versus a positive 1.52 per share in FY 2009. Consolidated revenues are down 6,000 crores – from 26,000 to 20,000 cr.

Besides, they have a massive FCCB problem even now. With a restructuring earlier this year, they reworked $645 million worth FCCBs ( Foreign Currency Convertible Bonds), changing the conversion price from 360 to 97.26. The new “floor price” – the lowest it can get converted at – is Rs. 74 – still higher than current prices.

If it’s converted, we’re going to see a 20% dilution. If it’s not, the company has to pay back 2,500 crores – money they may not have. (Their total loans are about 12,000 cr.)

So where’s the big upside? If there’s a huge increase in oil prices – people may go to wind, set up offshore wind farms and the like. Or, if the US dollar crashes a lot, though I’m not sure about that since USD loans are a small part of Suzlon’s debt, and in any case they have foreign currency exposure through Hansen.

Obviously I don’t consider this worth investing or in buying the rights issue if you’re already invested. There is not even a technical reason to invest right now – though it might be a short term pick leading into about 62. Overall, there must be better opportunities out there.

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