The stock had also perked up in the same way in February-March 1997, after the company announced its decision to sell of its 25.5 per cent stake in Kirloskar Cummins to the foreign partner Cummins Engine of US. Due to the sale of its stake, KOEL's fund position improved. Marketmen had, in fact, expected the company to reward its shareholders with a bonus issue, and saw excellent prospects in the company trying to consolidate its funds position.
However these expectations have proved to be short-lived as the company thought of ploughing these funds into its cash strapped steel company Kirloskar Ferrous and loss making Shivaji Works.
KOEL, now plans to improve the financial position of Shivaji Works by acquiring 70 lakh equity shares of Kirloskar Ferrous which is part of the trade investments of the latter company. The price is not yet decided but a substantial amount is expected to be ploughed out of KOEL into its loss making group company.
Shivaji works, which manufactures castings, suffered huge losses to the tune of Rs 22.62 crore in 1995-96. This has even eroded its networth by the end of March 1996. This was mainly due to huge rejection of its products because of wrong metallurgy and temperature.
Kirloskar Ferrous, on the other hand, is on an expansion spree. It plans to increase its foundry operations from 37,500 tpa to 60,000 tpa. To fund the expansion, it plans to privately place preference shares worth Rs 45 crore with KOEL. These preference shares are 12 per cent redeemable cumulative preference shares expected to be converted into equity shares either in full or part after three years from allotment and not later than 10 years.
Kirloskar Ferrous which supplies castings to major automobile manufacturers has performed poorly in the first half of 1996-97. Net profit has declined by 77.79 per cent to Rs 0.69 crore.
The state of the group companies being poor, it seems unlikely that KOEL would derive any dividend income from them. Indeed, the prospects of these two companies are linked to the fortunes of auto industry; they are unlikely to perform exceedingly well in the current year.
