I came across Electrosteel through an article which pointed out disparity in share price of this company on two Indian exchanges – Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) (https://www.wbca.st/PCiFkDw ). While the company was trading at 52 on BSE, it was 10 on NSE. It surely looked like a great arbitrage opportunity to buy on NSE and sell on BSE. Only a handful of people would have been able to make use of this opportunity due to very low trading volume on NSE.
Case was basically about a bankruptcy situation for Electrosteel. Trading was suspended on the stock and it resumed after Vedanta bought stake in the company and paid off some debtors. Now that company was seemingly out of the woods, seemed like the stock would reach the highs it was trading at a year ago.
I tried to work out the asset value of this company’s equity based on the notes they published along with 1st quarter P&L statement. Following observations:
- The company didn’t recreate the balance sheet for Jun 30, 2018 while there was lot going on with the liabilities.
- Vedanta paid off a chunk of debt and bought out 90% equity stake in the company.
- A lot of equity transformation was done as part of Vedanta’s deal to buy out the company as will be shown in this article soon.
Back of the envelope calculations suggest that the share price should be around Rs 10 per share. Vedanta paid Rs 53bn to company’s creditors. Of this amount, Vedanta got 90% stake in the company for Rs. 17.6bn worth face value of equity. Which means that approximate equity value of the company will be Rs 19.6bn. Divide this number by the total outstanding shares (1.96bn outstanding shares), it comes to Rs 10. Getting to the 1.96bn outstanding shares is the interesting bit.
Transformation in equity can be seen in the table below.
Here Step 2 and Step 3 are most important steps as these show the reduction in face value and number of shares for existing shareholders. What the table above effectively shows is that if you held 100shs in the company before this equity transformation, you would be left with only 2 shares after the process. And Vedanta owns 18 shares for every 2 shares you hold now.
This can be a perfect example for investors to stay away from over leveraged companies in a cyclical industry. Electrosteel Steels could not repay its debt, hence had to be bought out by Vedanta, in turn creating massive value destruction for existing shareholders.