Re: Desperate Help Needed Reg Essar Steel
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Read this. Maybe of some help to you.
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Essar Steel Limited CMP: Rs 41.8 as on 21-04-2005
Capital Reduction as per CDR scheme
As per the approved Corporate debt restructuring (CDR) scheme, Essar Steel recently announced reduction of equity capital by 40% in lieu thereof issue 0.01% cumulative redeemable Preference Shares.
In layman terms, existing 10 equity shares will get reduced to 4 shares of Rs 10 face value. In addition to this, four 0.01 per cent Cumulative Redeemable Preference shares of Rs 10 will be issued to the shareholders. These preference shares will be redeemed at par in four quarterly installments starting October 1, 2017.
Possible impact analysis
Presently, the equity capital stands at Rs 507.3 crore. This would have expanded to Rs 1420 crore on the back of Rs 912 crore equity dilution over the next 18 months, taking into account the conversion of preference shares to promoters and other companies.
However, the reduction of 40% of existing equity capital of Rs 507.3 crore essentially means that the equity capital will expand to Rs 1217 crore only now.
Taking these facts into account and the estimated net profit of Rs 1200 crore (excluding extra-ordinary items) for FY06. Theoretically, the announced reduction in capital will result in around 30% loss to existing shareholders. Thus, the scrip should correct by 30% from the price of Rs 60 per share from the date of announcement of the CDR scheme, which give a value of Rs 42.
The impact is explained below:-
Without equity reduction, With eq. redn. of 40%
Diluted equity capital - Rs.1420 crore, Rs.1217 crore
Net Profit(FY06E) - Rs.1200 crore, Rs.1200 crore
EPS (A) - Rs.8.5, Rs.9.9
No. of shares held (B) - 10, 6
EPS Value (A x B) - Rs.85, Rs.59
Erosion of value (%) witheq.redn. - 30%
Valuation:
Given the recent steep downward correction, most of the adverse impact of equity capital reduction seems to have been factored in the share price. In terms of valuations, at Rs 45; the stock is trading at 3.9x FY05 earnings (undiluted equity and inclusive extra-ordinary items). And mind you, huge extraordinary items dented FY05 net performance. PAT before extraordinary items stood at Rs 1055 crore.
However, one should keep in mind that trading in equity shares of Essar Steel scrip shall be suspended with effect from April 25, 2005 (i.e. closing hours of trading on April 22, 2005) on account of Reduction of Share Capital. Thus, traders need to exit the stock.
But investors with long-term investment horizon could hold on to the stock and accumulate in case of further declines. Especially since, the CDR scheme and consolidation of business will result in internal accruals of Rs 1000 crore in FY06.
Deepak Jain
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joy i posted this msg here as this was the only way i cld hv yr attetion
cld u plz tell me based on the above report wht i shld do...and in laymans lang wht does tht translate to