KARACHI: Fauji Foods will raise Rs7.8 billion by issuing rights shares at the price of Rs10 apiece, a stock filing said on Monday.

The 10th largest listed food company in terms of total sales is going to increase its paid-up capital by issuing 780.8 million shares to its stockholders in the proportion of 97.2 rights shares for every 100 ordinary shares.

In a rights issue, a company gives its existing stockholders a chance to buy newly issued shares at a price that’s usually less than the going market rate. The share price of Fauji Foods decreased 0.16 per cent on Monday to close at Rs19.02.

Companies opt for a rights issue usually when they’re in heavy debt and want to improve their financial health without resorting to bank borrowing.

The almost doubling of the company’s paid-up capital through the rights issue is aimed at reducing the “current debt levels” besides managing and optimising working capital, according to the securities filing on the Pakistan Stock Exchange.

The company’s long-term loans amounted to more than Rs6bn on June 30, down 1.5pc from the end of 2020. For the last calendar year, the ratio of its long-term debt-to-total assets was over 52pc, highest among all listed food companies.

The company believes a reduction in the debt level will mitigate the adverse impact on earnings on account of financial charges. “Optimised working capital will ensure smooth operations of the company,” the filing said, adding that Fauji Foods will maintain a healthy debt-to-equity ratio as result of the rights issue.

With a negative equity of almost Rs4bn at the end of 2020, the company’s long-term debt-to-equity ratio stood at -153.3pc.

Investors can subscribe to the issue either in cash or by using a loan previously extended to the company as a consideration, it added.

In the first six months of 2021, the company’s revenue increased 39.1pc to Rs4.5bn “despite some challenges in the business environment”. Its net loss for the same period shrank 57pc to Rs758.2m.

In their half-yearly report to the shareholders, the company’s directors said the firm “is on the path to progress and recovery from its operating losses”.

They also praised the government for not imposing any “adverse change” on the dairy sector in the 2021-22 budget while granting it the zero-rating status “that will provide a much sought-after tax relief” in the coming years.

Published in Dawn, September 7th, 2021