FCD evaluation: The coupon rate of 9.5 per cent per annum appears reasonable though on the lower side. The conversion terms do not appear attractive. Though a 20 per cent discount is on offer, the volatility in the stock and the paper industry make FCDs risky. However, investors with a high risk preference and patience can consider the FCD option.

Massive equity expansion: Following the rights, the equity portion will see the base rise to Rs 128.7 crore. The conversion of FCD will lead to a minimum rise of Rs 57.2 crore and a maximum rise of Rs 31.1 crore depending upon the eventual conversion price. The equity base is well set to more than double in the next 18 months and earnings are unlikely to keep apace. In this backdrop, the equity expansion could lead to dilution of earnings and act as a dampener on the stock's valuation.

Acquisition payment: The proceeds of the rights offer aggregating Rs 217.5 crore are to be used to buy a 66.92 per cent stake in Bilt Graphic Papers from Bilt Paper Holdings, a group company and ICICI. ICICI, with a stake of 17 per cent, will be bought out completely. Eventually, Bilt Graphic would be merged with BILT.

Behind BILT Graphic: In this context, the performance of Bilt Graphic is important. It had profits of Rs 2 crore for the year ended December 2001.

But it also has substantial accumulated losses (Rs 263.2 crore). This and the unabsorbed depreciation, Rs 373.2 crore, should enable Bilt stay out of the tax net for at least five to six years comfortably.

If Bilt Graphic's performance does not look up quickly, it is likely to act as a drag on the stock's valuation though its acquisition is good from a long-term perspective.

There are considerably high risks attached here. Bilt Graphic's forte is the coated paperboard segment where it is a leading player along with the ITC coated paperboard unit. But international pricing pressures have intensified in the last 18 months. Even if the industry cycle turns for the better, the price improvements in this segment may be more modest than the others. Domestic trends may also tend to tail global patterns. Since Bilt Graphic also derives around 35 per cent of turnover from exports, international price trends have a direct bearing on profitability to that extent.

Bilt background: Bilt Graphic is the erstwhile Sinar Mas — which set up a 1.15 lakh tonne unit in 1995. Sinar Mas was sold as its Indonesian parent, Pan Asia Paper ran into big time trouble. As a result, the deal has done at an attractive price for the Thapar group and to a lesser extent, for Bilt. As for Bilt, its profits in 2001-02 slipped lower following price weakness in various product segments.

It had a good year in 2000-01. But things may be better in 2002-03 than in 2001-02 as paper prices seem to have bottomed out.

Offer information: The rights offer opened for subscription on May 30 and closes on June 28. The lead manager is Kotak Mahindra Capital Company.

The detailed offer document can be accessed at SEBI's Web site, www.sebi.org (in the module on `investor grievance' under the head rights offers). Company information is also available on the Web site, www.biltpaper.com.

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