Essar Steel: Course correction

Essar Steel's relisted price reflects the fall in metal stocks

The Essar Steel stock relisted on the stock exchanges on Monday, after about a period of seven weeks during which the company's equity capital was reorganised.

The company cancelled equity shares in the ratio of 4 shares for every ten held. In exchange, shareholders were given preference shares redeemable after 12 years, again in the ratio of 4 shares for every ten held.

In short, a shareholder with 10 equity shares of Essar Steel would now have 6 equity shares and 4 redeemable preference shares. The preference shares have a face value of Rs 10 and a coupon of just 0.01 per cent, which means that at redemption investors would get just Rs 10.01. The present value of that receipt would be about Rs 4.45, if one discounts it using the yield of a 12-year bond.

For an investor who had ten shares, his four preference shares therefore have a present value of Rs 17.8. With the Essar Steel stock closing at Rs 53.4 on the NSE, the value of six equity shares stand at Rs 320.4.

Cumulatively, the value of the holding is Rs 338.2, which is 20 per cent lower than the value of the holding prior to the delisting. Essar Steel shares traded at Rs 42.35 before it was delisted for the capital reorganisation, giving a holding of 10 shares a value of Rs 423.5.

Based on the current price, investors would have done well to sell before the delisting. But to be fair to Essar Steel, metal stocks have fallen in the past couple of months - BSE's Metal index for instance has fallen over 10 per cent in the same period.

Furthermore, stocks like Jindal Vijaynagar Steel and Ispat Industries have fallen by more than 20 per cent. The decline in the value for an Essar Steel shareholder since delisting, therefore, is not out of the ordinary.

The trouble, however, is that Essar Steel's share price had corrected by 30 per cent just prior to its delisting, although BSE's Metal index had fallen just 7 per cent.

Jindal Stainless

Jindal Stainless has reported a 31.9 per cent growth in its earnings before interest, depreciation and tax to Rs 145.57 crore in the March quarter, despite net sales expanding only 24.25 per cent.

While export sales have been more or less flat, domestic sales jumped 52.61 per cent to Rs 627.15 crore. That's largely due to strong demand from the housing sector, as stainless steel is widely used in kitchen sinks, doors, window frames and knobs.

Raw material costs jumped 44 per cent to Rs 642.01 crore in the last quarter and that was largely due to higher prices of nickel and ferro chrome. Also, as a percentage of net sales, this overhead jumped sharply to 67.34 per cent.

To minimise the impact of higher input costs, the company had hiked product prices in the last quarter. In addition, the company expects to complete its ferro chrome project by the September quarter and this should help them manage costs better, going forward. To the company's credit, it has kept a tight check on other input costs like staff costs, power & fuel in the March quarter.

As a result, operating profit has grown 31.46 per cent to Rs 144.62 crore in the last quarter and operating profit margin has expanded 83 basis points to 15.16 per cent.

In the short term, growth momentum is also expected from the company's cold rolling facility at Hisar which has recently expanded capacity to 150, 000 tonne.

This move is expected to help the company get better average realisations.

Maruti Udyog

In an obvious bid to boost volumes of its 800 cc entry-level model, which have been coming off sharply over the last year, Maruti has cut prices of the model by about Rs 16,000 or between 6.8-7.5 per cent. Sales of the 800cc have been flagging for quite sometime now.

While the model had sales of around 10-11,000 vehicles per month in April -May 2004, this year the numbers were far lower at 6910 in April and 6116 in May. In fact, the 800 cc was once the bread and butter for Maruti, contributing 45 per cent of Maruti's total domestic volumes even in June 2003. Now its contribution is down to 15 per cent of the total volumes.

But the fall in Maruti 800's sales have been happening for some time now. Nevertheless, a more than proportionate rise in the sales of the Alto had made up for this fall. This year, however, Alto sales don't seem to have made up for the fall in sales of the 800. In April and May, sales of 800, Alto, Wagon R and Zen put together fell four per cent.

The cut in the price of the 800 should revive sales, since migration from a two-wheeler to a car could be even faster than before. Moreover, since the plant is fully depreciated, the contribution from this model would be reasonably good.

Indeed, after this cut, a potential competitor would be hard pressed to match the prices. The icing on the cake is likely to come from an excise duty reduction in the forthcoming budget.

At the current price of Rs 445, the stock trades at a forward multiple of 12.3 times estimated FY06 earnings of Rs 36. Given that the growth in cars is correlated to GDP growth, car sales should be reasonably good in FY06. So, the stock may still have some steam left.

With contributions from Mobis Philipose, Amriteshwar Mathur & Shobhana Subramanian