Bhushan Steel to Raise Funds Through Rights Issue

Bhushan Steel is coming up with its rights issue which was announced after a meeting held by the company board on February 21, 2012. As per the document filed with the BSE, the company will issue 1.42 crore equity shares of the face value of Rs 2 at the price of Rs 335 per equity share. The scrip is currently trading at the price of Rs 385 which is higher by 14 per cent to the issue price. The company has not yet announced the record date of the issue and therefore it would be prudent for the investors to wait for the record date announcement before buying the scrip.

The proposed right issue will be offered to the existing shareholders in the ratio of 1:15. That means the existing shareholder will receive 1 share for every 15 shares held by them as on the record date.

On the issue of proceeds the management has stated that 80 per cent of the proceeds will be utilised for the repayment of loans and about 20 per cent will be for the ongoing capital expenditure. The company had a debt of Rs 18,600 crore as on September 30, 2011. The debt to equity ratio prior to the rights issue is currently very high at 2.97x levels which won’t change much post the rights issue as it will be at almost 2.90x. The high debt in the company’s books remains a point of concern if the company wants to engage in any expansion plans.

Moreover, of the 62 per cent promoters’ holding, 32 per cent of that is pledged remains a major concern in terms of its future funding programmes. The company currently has a production capacity of 2.5 MTPA and produces steel products like cold-rolled sheets and galvanised coils and sheet from its three manufacturing facilities at Uttar Pradesh, Maharashtra and Odisha.

Meanwhile, the company for the December quarter 2011 has reported decent topline growth of 34 per cent on a YoY basis at Rs 2,407.02 crore. However, due to the higher interest cost and higher depreciation due to the commissioning of a new project, the net profit of the company during the quarter declined by 1.33 per cent on a YoY basis to Rs 276 crore.

At its current market price of Rs 385 and with annualised EPS of Rs 46.22, the scrip is trading at an PE multiple of 8.32x and EV/EBITDA of 7.72x. The current valuation at EV/EBITDA of 7.72x looks high given the huge amount of debt standing in the company’s books. Also, there are other concerns such as pressure on margins due higher interest outgo coupled with soft demand for steel products and the expected fall in steel prices which will impact the company’s performance in the ongoing quarter.

Further, 32 per cent of the promoters’ holding is pledged and this is one of the major risks to the company’s financials and its fund-raising plan. Therefore, given the above mentioned concerns and risks we recommend investors to stay away from the scrip from a long-term perspective.