The curious case of Fame India (Rights Issue)

Rights issues in Indian stock markets are an interesting case.

The basics quickly. Rights issue is nothing but an offer from a company to its existing shareholders to buy additional shares from the company at (usually) a discounted price from the market price. It is totally up to the Board of Directors and some special committees to decide the discounted price at which these shares will be issued. For example, Atul Auto had come up with a Rights issue of 1:4 at a price of Rs.30/- when the share price was around Rs.100/-. This essentially meant that the existing shareholders have the right to buy one additional share of Atul Auto at Rs. 30/- for every 4 shares they already hold (I’ll not discuss fractional entitlement here). Usually the share price drops ex-rights since there has been a dilution in equity. As a general note, if you are an existing shareholder, you better subscribe to the rights issue or get out of the stock totally else your shareholding gets diluted automatically.

Anyhow, coming to the Fame India rights issue. There are some political angles that I’ll not discuss here (something with respect to Anil Ambani getting control or not getting control of the company) nor will I discuss what Fame India does (you can always read up what they do elsewhere – at a broad level, they are in the entertainment business and you would have heard of Fame Adlabs cinemas). What I will discuss here is the rights issue itself and why I am pretty much stunned at the stock price movement.

So, the company proposed to issue 2,02,90,508 equity shares on a rights basis to its existing equity shareholders aggregating to approximately Rs.8928 lakhs (~90 cr). The rights issue ratio is 58 equity shares for every 100 equity shares held by the shareholders as on the record date. The record date was set for Jan 25th, 2012. The company issued these additional shares at a price of Rs.44/- (inclusive of premium of Rs.34) per equity share. The face value per equity share is Rs.10.

Rights are interesting in general because you tend to get some additional shares at a discounted price. What do you think was the price of Fame India? It was around Rs.48-Rs.49 for the better part of last year. Therefore, the discount worked to a mind-boggling  8.3% (and hence beats me why anyone would want to buy this stock and subscribe to this rights issue – I might as well wait and buy it from the market whenever). Anyway, quick calculations below –

image

The management has diluted equity at almost the same market price. The rights issue opens for subscription on Tuesday – February 7, 2012 and closes for subscription on Tuesday – February 21, 2012. We will know the extent of subscription only after Feb 21st, 2012.

All this is fine, but why did you entice us with ‘curious case’, you ask?

Well, the EPS for FY11 was 0.37 (on a diluted basis – which was before the rights issue). If there were 100 shares vying for the pie of 0.37, now there are 158 shares, resulting in a 37% dilution.

Yet, the share price has not dropped one bit.

Two. Why did the company go for the rights issue? Was it for growth which will nullify the effect of dilution down the line? Nope. They redeemed FCCBs they had taken way back in 2007 with a loan of 70 cr from ING Vysya in Sep 2011. Now, they are issuing this rights issue to pay off this loan of 70 cr (why the additional 20cr? Don’t ask – maybe they are filling in the merchant banker pockets). So, essentially they prevented dilution from FCCBs, by diluting through Rights issue.

Yet, the share price has not dropped one bit.

And they still have around 118 cr of loans (D/E > 1) and by the by, their cash position has worsened y-o-y.

Yet, the share price has not dropped one bit.

So, in summary, we have severe share dilution, weak balance sheet, poor earning track record and yet the management expected people to subscribe to the rights issue at almost the same market price. Beats me why I would. In fact, I would sell at these prices. Sometimes, its just ridiculous how share prices stay up just because one Ambani brother is in the stock. Anyhow, those were the reasons why I called it a curious case.

Views invited.

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  1. #1 by Anon on February 2, 2012 - 8:45 PM

    🙂 Curious indeed..some weird things do happen..chk out the rights issue of Aarey Drugs too..the rights price was 25 bucks, when the market price was just 14 odd bucks!!

  2. #2 by Yogesh Bang on February 2, 2012 - 9:44 PM

    Good One …

  3. #3 by Kiran on February 3, 2012 - 1:56 PM

    @Anon – yep, had tweeted about the ridiculousness of Aarey when they had come out with the issue. To be honest, I don’t think we have the full picture. It’s something to do with management wresting control/preventing a takeover etc. when they have this rights issue almost at or above the CMP. It doesn’t make sense to investors but I do think it makes sense to the management somehow.

    @Yogesh – Thanks 🙂

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