Tata Steel
Tata Steel is entering the capital market on 19th January 2011 with a further public offer (FPO) of 5.7 crore equity shares of Rs. 10 each in the price band of Rs. 594 to Rs. 610 per share, through a 100% book building process. The issue, slated to raise between Rs. 3,386 crore to Rs. 3,477 crore at the lower and upper price band respectively, is 2011's first major primary market offering, weeks ahead of PSU steel-maker SAIL's FPO. The FPO constitutes 5.94% of the company's post-issue paid-up equity share capital and closes on 21st January.
World's seventh largest steelmaker, Tata Steel plans to utilize issue proceeds for capex funding. It is expanding crude steel production capacity at Jamshedpur by 2.9 million tonnes per annum (mtpa), from 6.8 mtpa to 9.7 mtpa, at an investment cost of Rs. 16,372 crore. Rs. 1,875 crore from FPO proceeds will part-finance the expansion, which is likely to be operational partly in H1FY12 and completely by FY13.
Another Rs. 1,090 crore will go towards redemption of redeemable non-convertible debentures issued by the company in May 2008 and falling due for redemption in May 2011. This will slightly lower the consolidated debt levels of the company, which stood at Rs. 55,937, as of 30-Sep-10. The debt equity ratio, will however decline from 2.02 to 1.76, mainly on account of equity expansion. Balance funds raised in FPO of about Rs. 500 crore will be used for general corporate purposes.
Since FPO guidelines do not permit promoter participation, post-FPO, promoter holding will decline from 32.48% (as of 30-Sep-10) to a low of 30.55%, as equity will expand to Rs. 959 crore from the present Rs. 902 crore.
Now coming on to the most important aspect of any FPO - its pricing. The price band of 594-610 is very aggressive, considering it is barely at a 2.09% discount to Monday's closing price of Rs. 623 on the BSE. And if we were to consider Friday's closing price of Rs. 621.70 on BSE (last trading day before announcement of price band by company), the upper band of 610 is a mere 1.88% discount to the secondary market price. This is aggressive by all means and counts, given the very weak sentiments in the secondary market and extreme volatility over the last few trading sessions.
The company states that it adopted the FPO route vis-Ã -vis QIP to part-finance its expansion plans, so as to provide a window of opportunity to retail investors, who would have been left out in a QIP issue. However, it has failed to add any sweetener or attraction (read 'retail discount') for the retail investors. Mopping up close to Rs. 1,200 crore (35% of net issue) from retail category will definitely be a challenge for the company and the BRLMs (book running lead managers), given macro weakness and past few painful trading sessions. Probably, this has been realized by the BRLMs and the company, and we seen for the first time, a FPO has seen full underwriting by BRLMs, much before the issue opening.
We are not excited by this Tata Group company's FPO plans, as there is not enough left on the table for the prospective investors. Infact, value will be seen more in FPO of SAIL, as and when it will hit the market. Concern on global presence of Tata Steel still exists.
Hence, we give a thumps down to the issue, on grounds of steep pricing, for those looking for listing gains. This issue may be attractive only for the lenders and institutional investors of the company.