Even as the HR coil industry is facing a glut and global prices are on the fall, Ispat Industries Ltd, formerly known as Nippon Denro Ispat Ltd, is embarking on a major expansion project. The company is setting up a Rs 4792-crore HR coil project to add 3 million capacity.

As part of its project financing, the company offers 7.99 lakh convertible debentures of Rs 100 each to its shareholders in the ratio of one debenture for every two equity shares held. Noteably, the company is loaded with high cost debt funds which may have a bearing on future debt servicing and the interest offered on the instrument seems to be not in tandem with the investment risk. Also, after the debenture conversion (at the option of investors) alongwith a public issue of Rs 355 crore (which is likely to hit the market in 1998-99), equity will swell considerably and hence, earning per share will be low. In view of all this, the issue price seems to be higher. More importantly, prospects of capital appreciation in the near future are bleak.

The instrument

The shareholders have two options: debenture-I and debenture-II. They can opt for either of the option or both. The applicant will have to pay Rs 50 on application and Rs 50 on one or more calls. Debenture-I will be fully convertible into appropriate number of equity shares of Rs 10 each at a premium before 18 months from the date of allotment. Debenture-I has a coupon rate of 17 per cent payable half-yearly. The first payment of the interest will be due pro-rata from the date of allotment to till January 1, 1998.

The conversion price will be determined on the basis of 80 per cent of average daily closing prices of the company's shares listed at the National Stock Exchange. The daily closing prices will be accounted for a six-month period before the meeting of company board. However, the conversion price will be in the range of Rs 15-30. Moreover, since the scrip currently hovers around Rs 13.50 and a likely downtrend in prices after the issue, the conversion price will be around the lower limit of Rs 15.

Debenture-II will be fully convertible into appropriate number of equity shares at the option of debenture holders at any time after 18 months, but not later than 60 months from the date of allotment. However, debenture-II has a simple interest of 10 per cent per annum (net of tax). The catch lies in the fact that the interest will be paid only at the time of conversion or redemption, which will not be compounded. However, the outstanding principal or the interest accumulated thereon, will be optionally converted into equity shares of Rs 10.

Debenture-II has a `put' and `call' option after 36 months from date of allotment. If the investor does not opt for conversion or put option within 59 months from the date of allotment, these outstanding debentures will be considered as non-convertible debentures to be redeemed in three equal installments at the end of the seventh, eight and ninth year from the date of allotment. The interest on NCDs, to be accounted half-yearly, will be paid at the end of 60 months.

For conversion of debenture-II, the company will create fixed blocks of six-month period commencing from the first day after one year from the date of allotment. Similar to debenture-I, the conversion price of debenture-II will be arrived at based on the average daily closing prices on NSE, which will be in the range of Rs 15-30.

Project and funding

The ongoing project involves setting up capacity of 3-million tonne hot rolled (HR) steel coil alongwith a captive power plant at Dovli in Maharashtra. IFCI has put the total project cost at Rs 4792 crore. A major portion of the project cost is being financed through debt (Rs 3342 crore) and the balance of Rs 1450 crore will be met through the equity route. Of the debt portion of Rs 3342 crore, Rs 962 crore (rupee loan) is coming from FIs/banks, Rs 719 crore (foreign currency loan) from IFIs/banks, Rs 286 crore as loan with DPG from IFIs/banks, Rs 455 crore from International Finance Corporation, Rs 743 crore from Kreditanstalt fur Wiederaufbau, Germany and Rs 177 crore as lease finance from IFIs/banks. The average cost of rupee-term loan is high at 19.5 per cent. The company proposes to make a public issue of Rs 335.71 crore before March 31, 1999.

With the conversion price expected to be around Rs 15, the equity is expected to swell to Rs 692 crore, which will further increase after the proposed public offer by 1998-99. However, the profitability projections of IFCI are based on an equity of Rs 683 crore. The rating given by CARE to the debentures is BBB+, which indicates only sufficient safety regarding payment of interest and principal. But, any adverse change in the rating assumptions is more likely to weaken the debt servicing capability of the company.

The project is being implemented in two phases. Phase-I of the project is expected to go on stream in October 1997 and phase-II will commence operation in the second quarter of 1998. Phase-I will be producing 1.5 million tonnes of hot-rolled coil annually. However, a delay in the project cannot be ruled out as till January 31, 1997, the company could deploy only Rs 1811.71 crore (38 per cent of the project cost). As disbursement of debt finance depends on the progress in the project implementation, any delay in raising funds through the equity route may send profitability targets haywire.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.