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‘Ambani put’ comes a tad late

‘Ambani put’ comes a tad late
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First Published: Tue, Feb 19 2008. 01 36 AM IST
Updated: Tue, Feb 19 2008. 01 36 AM IST
When Reliance Power Ltd shares had listed at a discount to their initial public offering (IPO) issue price, a “Quick Edit” in this newspaper had talked of investors’ belief in the “Ambani put,” that the company would call upon large pools of friendly money to support the stock.
Well, the money power has been missing, but the Anil Dhirubhai Ambani Group has thought up an interesting way of supporting Reliance Power shares, at least in the short term. It will issue bonus shares only to minority shareholders, thereby lowering the cost of acquisition.
Using the stock’s Friday close of Rs385 per share as the benchmark, the bonus issue could be as liberal as one for every five shares held (1:5) to appease institutional and high net worth inventors who bought the stock at Rs450. But if the target is retail shareholders who bought at Rs430, the ratio could be lower at about 1:7.
Whatever the ratio, a large number of IPO investors have already exited the stock. About 9.46 crore shares, or 42% of the IPO issue, were marked for delivery on both stock exchanges until last Friday.
For these investors, the bailout has come a tad bit late. Investors who borrowed funds to invest in the IPO will still incur losses (unless the bonus ratio enters benevolent territory), since their break-even price was about Rs560 per share. And in all this, the promoters would be hardly affected since their stake is likely to reduce by not more than 1 percentage point. In any case, their cost of purchase was less than Rs17 per share, while minority shareholders have spent between Rs430 and Rs450 in the IPO.
As an aside, since Reliance Power’s decision was unprecedented, the markets didn’t know exactly how to react to the announcement at first.
Reliance Energy Ltd holds a 45% stake in the company, and whatever the bonus ratio, it’s inevitable that its stake will fall. (Being a promoter company, it won’t be issued bonus shares). Now, much of Reliance Energy’s market value (Rs40,421 crore before the bonus announcement) is derived from its holding in Reliance Power (its 45% stake was valued at Rs39,069 crore last Friday).
A drop in its shareholding in Reliance Power should have led to a correction in its shares when the markets opened on Monday, but instead they rose and at one point were trading about 3% higher than the previous day’s close. The shares eventually corrected and closed the day 0.6% lower.
Sesa Goa rides high on iron ore pricing power
Shares of Sesa Goa Ltd rose 5.8% to Rs3,336 a share on Monday on news of an agreement between three Asian steel producers and iron ore producer Cia Vale do Rio Doce, raising iron ore prices by 65% from 1 April. The stock had fallen sharply, to a low of Rs2,000 in late January and it has clawed back quite a bit of lost ground since then. There’s no reason why it shouldn’t. As Prasad Baji, analyst with Edelweiss Securities, points out, “Here’s a company which is not only delivering price increases, but also higher volumes. What’s more, it has Rs1,200 crore worth of cash on its balance sheet and it’s a zero-debt company.”
Earlier this month, National Mineral Development Corp. Ltd officials had estimated that international iron prices would rise by 40-50%; the 65% increase will therefore come as a positive surprise.
With 95% of its production being exported, Sesa Goa’s new contract prices too should see a similar rise. Sesa Goa has also been increasing the proportion of iron ore sold on a spot basis. With spot prices being so much higher than contract prices, that strategy makes eminent sense. Analysts say the company’s mix of contract to spot sales is now around 50:50.
Sesa Goa’s results for the December quarter were exceptionally good, with consolidated profits after tax and revenues rising by 144% and 90% year-on-year respectively. Baji says volume growth of 20% year-over-year and price increases contributed to the growth.
Another positive is that, with so much spare cash and no debt, the company won’t need to dilute equity to fund its expansion. Sesa Goa is increasing its pig iron and met coke capacity.
Interestingly, the stocks of Japanese and Chinese steelmakers rose after the iron ore price hike was announced, indicating that steel producers are confident of being able to pass on the increased costs. That augurs well for the sustainability of the price hike. At current levels, the Sesa Goa stock trades at around 8.4 times fiscal 2009 consensus estimates, which analysts say is lower than the valuations of international iron ore companies. Also, the higher-than-expected price hike may lead to an upward revision in the earnings per share estimates.
Write to us at ­marktomarket@livemint.com
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First Published: Tue, Feb 19 2008. 01 36 AM IST