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Radhika Kamath

SHAREHOLDERS can consider investing in the rights offer of Southern Iron and Steel (SISCOL), as the prospects for appreciation are attractive. Our recommendation is based on the positive outlook for the steel sector, and the benefits likely to accrue to the company from the ongoing debt restructuring and the proposed augmentation in capacity.

The offer is priced at Rs 10, which is at a deep discount to its market price of Rs 24.85. The stock is undervalued, making it attractive.

SISCOL makes long products, which are used by the housing/construction sector. The company's performance has not been impressive. The company has been operating in a tight environment of spiralling iron ore prices which it has not been able to pass on to its customers. The current capacity utilisation is also at a less-than-optimum level, which deprived the company of economies of scale while pushing up the operating costs.

This may alter with the change in management and the ongoing debt restructuring exercise. With the objective of restructuring the company and making it financially viable, a scheme of debt restructuring was approved by the management and the lenders in September 2004. Under the scheme, the erstwhile promoter, Lakshmi Machine Works, has transferred its entire holding in the company to the Jindal group, resulting in a change in ownership and management control.

This has helped bringing in fresh funds by way of debt and equity. The scheme is expected to reduce the company's debt burden substantially, thereby improving its financial health. Further, with the new promoters having considerable experience in this line of business, the project should be quickly implemented. Scaling up the existing capacity along with additions, would provide a strong impetus to the company in changing its operating parameters.

The company has suffered mainly on non-availability of coke and iron ore. The addition of a captive coke oven would insulate Siscol from the volatility of international prices. With Jindal Vijayanagar Steel bagging the tender to mine iron ore in Salem district of Tamil Nadu, the supply problem could ease and there could be considerable savings in transportation cost.

At the macro level, firm trends in steel prices, and robust demand from user industries such as construction, auto and engineering should strengthen SISCOL's business performance. However, softer-than-expected trends in prices of steel products and a slowdown in demand, could have a bearing on the company's profitability.

While the offer presents reasonable prospects for appreciation, there is an opportunity cost of locking in funds, as they could be deployed in stocks from sectors that are more attractive than steel, from a growth perspective. There is also the risk of a merger with one of the companies in the Jindal group; the latter has been known to restructure operations through mergers and asset transfers.

A merger situation raises the issue of a swap ratio that could be adverse for SISCOL's shareholders. This is especially so in the light of the weak fundamentals and high equity base of SISCOL. However, as the opportunities from the offer seem to outweigh the threats, we recommend that the investors subscribe to the offer.

Offer details: The rights offer is in the ratio of 23 shares for every 10 held. The equity base would rise from Rs 75.5 crore to Rs 249.2 crore. The issue price is Rs 10 and the entire amount is payable on application. The lead manager is ICICI Securities. The offer closes on April 29.

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