JSW Steel: Two events to watch out for in the near term

In May 2010, JSW Steel issued 17.5 cr warrants to Sapphire Technologies, a promoter group company. These are convertible into equity shares at a price of Rs 1210/share at any time within 18 months from the issue date.

The main objective of the issue was to strengthen the balance sheet of the company, and to fund the expansion announced in West Bengal and Jharkhand. On conversion of these warrants, the share capital of the company would increase by Rs 17.5 cr, which accounts for 7.84% of its current paid up capital.

The warrants will convert within 18 months of the issue, i.e. within Dec 15, 2011, and on complete conversion of these shares, the company would be able to raise Rs 2117 cr. However, the stock price of the company is currently trading at a 50% discount to the issue price, at Rs 609. Therefore, the question is whether the conversion of the warrants at the steep discount will take place or not.

During the September 2011 quarter results, the management had stated that it will go for the conversion of these warrants, which will lead them into losses. However, we believe that most often, companies do not go for the conversion due to the steep discount in the prices.

Further, the company had issued 3250 foreign currency convertible bonds (FCCB) of USD 1 lakh each, of which 8 bonds got converted and 498 bonds were repurchased. Therefore, a total of of 2744 FCCBs remain outstanding for conversion before June 21, 2012. This would lead to a dilution of 6.7% on the existing share capital.

At the current market price, the likely scenario is that the FCCB holders will not convert them into equity. In that case, the company has put the criteria to redeem these bonds multiplied by 142% to the principle amount, which is Rs 1411 cr at Rs 52/dollar. This will result in a total outflow of Rs 2004 cr, and therefore, will lead the company to shed around Rs 600 cr more money from the pocket. To redeem these bonds, the company will raise further funds at a higher cost, which will put pressure on the balance sheet of the company in the current economic situation and higher interest rate regime.

However, there is some time to go before the conversion, as it will happen after 6 months. Investors should watch out for these 2 events in the near term, which can impact the share price of the company.