Equity Watch

Sorry Mr. SP TULSIAN I don't agree with you on ESSAR STEEL valuation

Mr SP Tulsian wrote on Moneycontrol about Essar Steel valuation: and I quote
“The promoters of Essar Steel have proposed to make an open offer to acquire 14.72 crore equity shares of the company (being 12.92 per cent equity) with a view to delist the company and have fixed a floor price of Rs.38 per share. The bidding by shareholders will be held between 24th September and 28th September. The promoters are presently holding 87.08 per cent stake of the company, which has, its present equity of Rs.1139.81 crores divided into 113.98 crore equity shares of Rs.10 each.

The promoters have stated that delisting is meant to offer exit opportunity for shareholders and to offer more flexibility in running the company. If promoters stake goes beyond 90%, they are entitled to delist the company.

Let’s us try and see as to what is the correct valuation of Essar Steel. The company could be valued on different parameters like book-value, enterprise value, peer valuations, replacement cost and discounted cash flow etc.Book-value of a share as on 31-03-07 was at Rs.37 and in view of an expected EPS of Rs.8 plus for FY 08, the book-value of share could be presumed at Rs.41 as on 30-09-07.Under the replacement cost method, the cost of setting up an integrated steel project is about Rs.3,000 crores, per million tonne. Since the capacity of the company is (largest gas based steel plant) of 4.60 million tonne, the same is valued at Rs.13,800 crores. Since, the debt (net off cash) is about Rs.4,000 crores, the net value works out to Rs.9,800 crores, resulting in, value per share at Rs.85.The company has reported its quarterly results, for quarter ended June 07, wherein net sales was at Rs.2,565 corres with EBITDA of Rs.642 crores and PAT of Rs.231 crores. Annualised EBITDA can be estimated at Rs.2,500 crores, in view of robust steel industry prospects. The recent acquisitions were made at EV/EBITDA of 7 times, and hence company can be estimated at 5 times, which translates into an EV of Rs.12,500 crores. By deducting debt of Rs.4,000 crores, net EV works out to Rs.8,500 crores, giving value per share at Rs.75.

565 corres with EBITDA of Rs.642 crores and PAT of Rs.231 crores. Annualised EBITDA can be estimated at Rs.2,500 crores, in view of robust steel industry prospects. The recent acquisitions were made at EV/EBITDA of 7 times, and hence company can be estimated at 5 times, which translates into an EV of Rs.12,500 crores. By deducting of Rs.4,000 crores, net EV works out to Rs.8,500 crores, giving value per share at Rs.75.The estimated net profit for FY 08 is expected to be close to Rs.1,000 crores, resulting in an EPS of Rs.8.80. The large integrated steel players are discounted at forward earning by about 6 to 7 times, when compared to Tata Steel and JSW Steel. Hence, average PE multiple of 6.5 gives value per share at Rs.57.

565 corres with EBITDA of Rs.642 crores and PAT of Rs.231 crores. Annualised EBITDA can be estimated at Rs.2,500 crores, in view of robust steel industry prospects. The recent acquisitions were made at EV/EBITDA of 7 times, and hence company can be estimated at 5 times, which translates into an EV of Rs.12,500 crores. By deducting of Rs.4,000 crores, net EV works out to Rs.8,500 crores, giving value per share at Rs.75.The estimated net profit for FY 08 is expected to be close to Rs.1,000 crores, resulting in an EPS of Rs.8.80. The large integrated steel players are discounted at forward earning by about 6 to 7 times, when compared to Tata Steel and JSW Steel. Hence, average PE multiple of 6.5 gives value per share at Rs.57.Cash profit of the company for June 07 quarter, was at Rs.518 crores (net profit Rs.231 crores, plus, depreciation Rs.187 crores plus deferred tax Rs.100 crores) and hence, annualised post tax cash earning is estimated at Rs.2,000 crores. The same can be multiplied with 6, which gives a gross valuation of Rs.12,000 crores. Deducting debt of Rs.4,000 crores, net valuation comes to Rs.8,000 crores, giving a valuation per share of Rs.70.

565 corres with EBITDA of Rs.642 crores and PAT of Rs.231 crores. Annualised EBITDA can be estimated at Rs.2,500 crores, in view of robust steel industry prospects. The recent acquisitions were made at EV/EBITDA of 7 times, and hence company can be estimated at 5 times, which translates into an EV of Rs.12,500 crores. By deducting of Rs.4,000 crores, net EV works out to Rs.8,500 crores, giving value per share at Rs.75.The estimated net profit for FY 08 is expected to be close to Rs.1,000 crores, resulting in an EPS of Rs.8.80. The large integrated steel players are discounted at forward earning by about 6 to 7 times, when compared to Tata Steel and JSW Steel. Hence, average PE multiple of 6.5 gives value per share at Rs.57.Cash profit of the company for June 07 quarter, was at Rs.518 crores (net profit Rs.231 crores, plus, depreciation Rs.187 crores plus deferred tax Rs.100 crores) and hence, annualised post tax cash earning is estimated at Rs.2,000 crores. The same can be multiplied with 6, which gives a gross valuation of Rs.12,000 crores. Deducting debt of Rs.4,000 crores, net valuation comes to Rs.8,000 crores, giving a valuation per share of Rs.70.When compared with peers like JSW Steel, which has a market capitalization of Rs.11,000 crores, and Rs.4,000 crore of debt added, for a capacity of 5 million tonnes, gives a valuation of Rs.3,000 crores per million tonne. Since the company is into process of expanding its capacity from 3.60 million tonne to about 6.80 million tonne by March 09, the same is presumed at 5 million tonne. Even Tata Steel has a market capitalization of Rs.42,200 crores. On consolidated basis, capacity of 26 million tonnes, with debt of about Rs.45,000 crores, valuation comes to about Rs.3,300 crores, per million tonne.

Also, in case of delisting, a premium of 15% to 20% should be offered to the existing shareholders, on fair value. So, a valuation range of Rs.60 to Rs.80 per share is worked out under different methods. The same can be taken safely at Rs.72 per share (Rs.60 at the lowest of various method plus 20% thereon), which should be the asking price, by the existing shareholders.

In the past, the promoters have failed in acquiring shares of Essar Shipping for delisting, as floor price was quite low at Rs.31.62 per share, while price discovered was much higher, against book-value of Rs.53.80 per share.

It is also learnt that Essar group has made an application to SEBI, to seek exemption from open offer, to delist the shares of Essar Oil. Read our cover story, of 30th August, 2007, in this regard.

So, we advise the existing shareholders to indicate a price of atleast Rs.72 per share to enable the promoters to discover a fair price for delisting.”
Mr Tulsian , I do not agree with you because of the folowing reasons:

  1. Till 1994 shares were issued by Company to all the Share Holders on an equitable basis, though with the premium of Rs.20/- to Rs.60/-;
  2. From 1996 to 2001due to down trend in the Steel Industry no equity or preference share was offered to any body;
  3. From January 2002 onwards, the upward trend in Steel prices by 50% internationally and 30% in domestic market, was a relevant fact which was in the knowledge of the promoters and it inspired them to commit the fraud to grab the company by becoming its absolute owners;
  4. For doing this, the promoters took the help of the De listing guidelines of SEBI issued in Feb.2003, and also misused the very purpose and motive of the Corporate Debt Restructuring Scheme of the Reserve Bank of India (R.B.I.) , laid out for Banks & Financial Institutions;
  5. In July 2003, they issued equity ONLY TO THEMSELVES AT PAR to the extent of Rs.170 crore approximately, under Corporate Debt Restructuring there by increasing their ownership shares from 34% to 52% fraudulently in one stroke. Hence they cheated the Public Shares Holders of their rightful share in the Company; –
  6. The Promoters again reduced entire equity of the Company by 40% .It is noteworthy that this reduction was done proportionately with promoter as well as Public Share holdings;
  7. After this the Company again issued shares to Promoters and Group Companies only (excluding the public share holders entirely), under Corporate Debt Structuring @ Rs.18/- which after accounting for equity reduction amounted to Rs.11/- , i.e. almost at par. It is note worthy that no new capital was brought in to the Company by the promoters and this issuance was to the exclusion of public share holders. By this fraudulent act Promoters & Group Companies illegally made their share holding approx 74% of Essar Steel. AGAIN NO OFFER WAS GIVEN TO THE PUBLIC SHARE HOLDERS;
  8. Then the Promoters went to Gujrat & Andhra Pradesh High Court for amalgamation of two subsidiary companies with Essar Steel.. Again the hidden agenda was to increase the promoters & group holding to 87% in Essar Steel.
  9. It is also relevant to point out that in 2003 when promoters issued equity to themselves against book entry, there by taking their holding to 52% from 34% ,they claimed that this was being done under corporate debt restructuring sanctioned by R.B.I. which was pending High Court approval. Also when they took their equity holding from 53% to 74% in 2004 they claimed that this was being done under Corporate Debt Restructuring sanctioned by Reserve Bank of India. While firstly, issue of equity shares at par to the promoters, was not a part of the guidelines issued for Corporate Debt Restructuring by R.B.I , as it was grossly against the principle of natural justice;
  10. It is against the principle of natural justice that between 2003 & 2006 when Essar Steel was growing by leaps & bounds the promoters increased their ownership ratio from 34% (approx) to 87% while the ratio of Public Share holders was reduced to 13 % only. Hence IT IS NOT JUST THE CASE OF INSIDER TRADING BUT ALSO GROSS FRAUD BY THE PROMOTERS AGAINST THE PUBLIC This was done merely with the objective of becoming 100% owners of Essar Steel by illegally and fraudulently squeezing out Public Share Holders from the wealth being created by Essar Steel.
  11. It is also important to study the performance of Essar Steel Shares as compared to the performance of the NIFTY from March 2005 to March,2007.
  12. It is obvious that the promoters being aware of the D- listing guidelines of SEBI in the year 2003 increased their equity to 87% from approx. 35% between 2003 and 2006. These illegalities have been committed with the connivance of Company Law Board and other Government Officials. Now they require only 3% from the Public to seek D- listing.
  13. In the Balance Sheet that we downloaded from their website, Essar Steel has mentioned that unsecured loan of promoters and group Companies was converted in to equity at par as a part of RBI sanctioned Corporate Debt Restructuring Scheme This is a false statement given in the disclosure. Further they have tried to give the impression that it has the approval of High Court. We would like to mention here that ,conversion of promoters loan into equity at par in July 2003, as well as issuing of optionally convertible preference shares in 2004, to Essar Power Limited,has not been ratified by any High Court. as is evident from the following paras :-

i) The Co. went to the High Court for ratification in petition No.176 of 2003 to apparently make the CDR scheme binding on promoters and lenders. But the hidden agenda was to convert certain book entries into equity, at the cost of the public share holder, camouflaged in the CDR scheme by the Promoters intentionally .

ii) They converted their loan into equity in July 2003 ,even while ratification for the same was pending in the Gujrat High Court. This was apparently done under an illegal special resolution passed in an A.G.M. in July 2003, for which no notices were sent to us and other public share holders. BY SENDING LETTERS RANDOMLY TO THREE HUNDRED PUBLIC SHARE HOLDERS OF THAT TIME, IT CAN BE VERIFIED WHETHER SUCH NOTICE TO PASS THIS SPECIAL RESOLUTION WHICH WOULD INCREASE SHARE HOLDING OF PROMOTERS FROM 32% TO 52% AMOUNTING TO MAJORITY SHARE HOLDING was ever sent to any share holder. This was the first leg of the fraud.

iii) In Sept 2003, Essar Steel filed a petition No.223 of 2003,for reduction in share capital.

iv) Again in year 2004 one more illegal special resolution was passed to issue optionally convertible preference share to Essar Power and the promoters alone, against outstanding loans (which were Book Entries only) It is noteworthy that the promoters were holding majority shares by the fraud committed earlier. This was part 2 of the fraud and it made them approx. 74% owners of Essar Steel.

v) In the year 2005 , Company Petition No.176 of 2003, was mysteriously withdrawn. which sought to ratify all the proposals of Corporate Debt restructuring including conversion of promoter loan into equity at par.

vii) Company petition No.223 of 2003 envisaging reduction of share capital was accepted in year 2005 after withdrawal of 176 of 2003

From the analysis of the above mentioned facts, it is obvious that the promoters of Essar Steel purposely, as the company was becoming immensely profitable, set out a very complicated fraud to steal the wealth of the public share holders.

No fresh capital was brought into the company by Essar Promoters. Certain book entries were converted into equity at par, to take promoters and group companies from 32% to approx.74%. The false impression given to the media and share holders was that this was being done under the Corporate Debt Restructuring Sanctioned by the RBI, where as Corporate Debt Restructuring was purely a non statutory, non- binding , voluntary debtors creditors arrangement. In any case conversion of promoters unsecured loan into equity was outside the guidelines of Corporate Debt restructuring

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3 thoughts on “Sorry Mr. SP TULSIAN I don't agree with you on ESSAR STEEL valuation

  1. Mahesh Shah says:

    HOW MUCH GOVT. WILL LOOSE AFTER DELISTING :

    If Ruias are allowed to GRAB Essar Steel with their Maurtius Company the follwing doubts arises :
    1. As Essar Holding is regd outside India will they pay IT ?
    2. If they sell the company outside India to anyone will they be liable to pay Income Tax and Capital Tax ?
    We have a current case of Hutch Essar where Govt.have to serve the notice for not paying Tax – though Ruias are not involved
    3. Ruias are going to use all local resources like iron-ore,power at subsidised rate, ST benefits etc etc and will show profit outside India – how much revenue will be lost by nation ?
    4. They are also quite about refunding Pref Shares issued to small investors by reducing 40% shareholding – will this money be refunded at approoriate rates ? and that to when ? Otherwise they will be using investors money for their benefit
    5.If Delisted a small share holder will not be able to sell shares if not listed on any exchange in India
    I hope ALL CONCERNED Govt Authorities will look into the matter before allowing to cheat the investors and nation

    Like

  2. jon says:

    Ya i accept that , these fraudsters are playing with hard earned money of indian people.
    I don understand Y the Govt is turning a blind eye to these people,
    There should be an enquiry into this.

    The Ruias are the worst kind of Business family i have ever come across.

    Like

  3. hi!This was a really superb topic!
    I come from milan, I was fortunate to come cross your Topics in digg
    Also I obtain much in your blog really thanks very much i will come every day

    Like

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