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Dunlop in equity-loan swap deal

Calcutta, March 19: Dunlop India is set to place a 14.5 per cent stake with a clutch of foreign banks to raise $80-90 million or Rs 400 crore to revive the company.

The promoter group, led by Pawan Ruia, holds 74.49 per cent in Dunlop, which Ruia bought from the Chhabria family in 2005. Following the dilution, his stake will come down to about 60 per cent.

Incidentally, the stake sale is likely to either take place at the par value of Rs 10 or at a small premium. Given that the company’s paid-up capital will become Rs 72 crore after the rights issue announced last week, the placement will not bring more than Rs 7-10 crore to Dunlop’s coffers.

In return for cheap equity, these banks will advance loans worth Rs 400 crore to the company at a softer rate than what it could have raised from domestic lending institutions.

The agreement between the banks and the company is likely to be signed shortly.

The innovative equity-debt deal will benefit both sides. Lenders are betting on the company’s turnaround and potential upside from the stock price. They will get the shares cheap at the moment.

The company will be able to save on interest cost by procuring cheap foreign loans.

At one point of time, the new management was trying to place shares at a premium to revive the company. But it was unable to do so. It could not raise loans at a good interest rate from domestic institution either. Since the Dunlop stock is not traded on the bourses, a placement did not find favour with any investor.

Now that the Board for Industrial and Financial Reconstruction (BIFR) has directed stock exchanges to lift the suspension, trading in Dunlop shares will start soon.

In order to maintain the liquidity in the market when it lists, Dunlop had sought the BIFR nod for a rights issue, which the board granted. The fund raised by the deal would meet the company’s requirement of the Rs 600-crore revival package placed before the BIFR. Dunlop is expected to spend Rs 200 crore as working capital, Rs 150 crore to meet past liabilities and Rs 100 crore as refurbishment.

The development comes at a time when the production process is gradually stabilising at both Sahaganj in Bengal and at Ambattur in Chennai.

Initially tyres for commercial vehicles and OTR (off the road) have been taken up. Trial run for industrial products like conveyer belts will start in a few days.

If the tyre prices remain steady and the new management runs the plants efficiently, it can post Rs 1,000 crore turnover and a healthy profit next fiscal. The company has an accumulated loss of Rs 410.8 crore as on March 31, 2006, which has eroded its net worth.

Dunlop has valued its real estate assets at Rs 900 crore. When reflected on the balance sheet, it may breathe a new life into the company.

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