I haven’t participated in a Rights issue yet but what I do know is that in a Rights issue, existing shareholders get the right to purchase shares at a discount to current price. The discount is given to compensate shareholders for the dilution due to expansion of equity base.
Any equity raise - whether FPO/QIP/Rights issue - will cause dilution. But it also increases firm value if the balance sheet is already stressed i.e. D/E ratio is unsustainably high, which it was in Rushil’s case. Why does firm value increase? An equity injection reduces the probability of bankruptcy due to default and hence increases overall firm value in a DCF calculation. So this equity increase is only good news for investors.
The stock is now trading at TTM PE of 16.4x. Even if this Q performance was an outlier (Which may not be the case), rolling yearly EPS may touch 40 in FY23 which would mean a PE ratio of less than 12x at current prices. I am expecting price to rise sharply this week on the back of these results and the equity raise. I was worried about the balance sheet, this move is definitely a positive for me.
I had asked them questions around this in the last concall, they weren’t sure of the capital structure then. But good to see they have acted here without much delay.
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