Reader query, answered on 12th July.

Strong likelihood of Tatas diluting the equity base of Bhushan Steel significantly at some point, as a result of which per share value of Bhushan steel stock will be next to nothing.

Bhushan Steel owes around 35,000 crores to Tata Steel subsidiary Bamnipal Steel in the form of inter-corporate loans, as part of NCLT settlement to pay off financial creditors. Add around 500 cr market cap, EV is around 35,500 crores for around 5mt capacity, which is approx. 7000 cr/t. This is around 2–2.5x times higher than peers.

Worse, there is huge equity dilution likely, as out of the 35,000 crores debt, 9000 crores are in convertibles. Tata’s have expanded the authorised share capital to around 9520 crores post takeover, which comprise of 4650 crores of common shares + 2.2 crores of preference shares. Outstanding common shares are a paltry 110 crores now.

Assuming, Tata’s choose to convert at 2 rupees FB, that will add another 4500 crores shares, diluting per share value to anywhere between Rs 6 to few paisa, as shown below:

1.Assuming entire debt is outstanding:
{5.5x 5000 – (35,000 – 9,000) }/ 4610 = around 0.32 rupees per share.

2. Assuming entire debt is repaid:
5.5×5000/4610 = around Rs 6 per share.

Assumed EV of Rs 5000 cr/t of steel, which is on the higher side (Rs 3000 – 3500 Cr is more realistic). Also, not factored in any additional loans to pay-off operational creditors, employee dues, etc. These will take down the price further.

Just a theoretical exercise to emphasize why you may not want to invest in this stock.

Disclosure: Above perspective does not constitute financial advice. I may have vested interests, please do your own research