Restructuring RINL For Better IPO Pricing

The Government in its thirst to raise funds through divestment has been offloading its stake in various PSUs. It sold a 10% of its stake in New Building Construction Company (NBCC) in the first half of the year. Rashtriya Ispat Nigam (RINL) on the other hand failed to even get its valuations right. After failing to raise Rs 2500 crore through an IPO, RINL is now undergoing a financial restructuring program. Readers must not misunderstand Financial restructuring as debt restructuring. These are two different concepts.

The government was expecting to kick start its divestment activity this year with the RINL IPO. The IPO was earlier proposed to open in July 2012, but was deferred twice in the same month due to the weak sentiment in the stock markets as well as a major fire at the company’s Vizag steel plant that killed 19 people. The IPO was again deferred in October by the government over differences between the Steel Ministry and the merchant bankers on its price band. The merchant bankers suggested a price between Rs 15-17 per share while the Steel Ministry had asked for a price of over Rs 20. The book value of the RINL at that time was Rs 22.50 per share.

After all its attempt, RINL was on brink to lose the 'Navaratna' status which offers government companies an autonomy in decision making of investment of up to Rs 1000 crore. As the company is setting up new capacities, this would help it to take speedy decisions for its capex plans going ahead. Listing is mandatory for the 'Navaratna' category companies. The government now has given an extension of one year to RINL's 'Navaratna' status after a recommendation from Steel ministry. The status will now expire in November unless it brings a successful IPO.

With the proposed plan RINL is now moving in the right direction to restructure its balance sheet by decreasing its equity base. It will now transfer 40-60% of equity in reserves and will also redeem 1632 crore of preference shares, which will increase its earnings per share. Besides this, the company is also looking to merge its subsidiary, Eastern Investment (EIL) in a no cash transaction, which will further strengthen its balance sheet. EIL owns a stake in certain mining companies which will give it additional access to raw materials such as iron ore, limestone, dolomite, etc. Investors my see value in this backward integration.

RINL is a second largest steel making company in India with a capacity of 3 million tonnes (MT) a year. It is also proposing to increase its capacity to 6.3MT by 2015.

The new measures would nearly double its EPS and hence, will give it a better per share price when it goes for divestment. One however has to wait and see how things unfold on the IPO front. The company may again come up with its IPO before November 2013 to save its 'Navaratna' status. One may see improved financial statements then and hence a price of over Rs 40.