Rights to grow

Insight

Capital constraints, which have so far held back the country’s largest bank, the State Bank of India (SBI), from meeting its growing credit requirements, may soon be a thing of the past.

SBI confirmed on December 5 that the Union government had agreed to subscribe to about Rs 10,000 crore of shares in its rights issue of Rs 16,742 crore. This is the first equity issuance by SBI in a decade and is expected to be complete by March 2008.

The rights issue will ensure that the government maintains its current stake of 59.73% in the bank.

Importantly, with this capital infusion, SBI will be able to cater to growing credit requirements and also meet Basel II norms, which specify the portion of capital a bank would need to keep aside to provide for various financial and operational risks.

The issue is likely to enhance the bank’s Tier I or core capital by about 45%, say analysts. Tier I capital essentially includes capital that need not be returned, i.e. equity capital and disclosed reserves. SBI needs around Rs 5,500 crore to meet Basel II norms and an additional Rs 4,500 crore to provide for employees’ retirement benefits according to AS-15, the new accounting norm.

This move also allows the bank to increase Tier II capital, should the need arise. Tier II capital of a bank can be as much as the Tier I capital. Therefore, in this case, the bank can raise Tier II capital to the extent of Rs 16,742 crore. Hence, this move allows the bank to raise a capital of around Rs 33,500 crore in total, should it need the amount.

In a report dated November 30, 2007, research analysts Rajeev Varma and Veekesh Gandhi of Merill Lynch maintain that the issue is likely to be in the ratio of 1:6 and at a discount of 20% to the market price, leading to an equity dilution of 16-17%. The dilution in equity can be sustained only if the earnings also grow proportionately, lest the earnings per share fall.

Analysts Aditya Narain, Manish Chowdhary and Himani Shah of Citigroup feel the equity dilution will lead to an earnings dilution of 6-7%.

The government’s infusion will be by way of issuing government securities, qualifying as SLR bonds (securities approved by RBI under the SLR limits of banks) and not cash. Details regarding the marketability, duration and coupon of these instruments are not available yet. As per news reports, the government expects an outgo of Rs 790 crore on the bonds, which translates to a coupon of 7.9%.

SBI’s stock has appreciated by 47.6% since the time the SBI announced its rights issue on September 12. At Rs 2,396.60, it trades at 18.34 times its estimated earnings for 2009. Analysts are positive on the stock.

Opportunity pipe

Maharashtra Seamless, the D P Jindal group flagship, is gearing for a play in Europe with the proposed acquisition of the Romanian seamless pipes plant of SC Republica SA.

The largest producer of seamless pipes in India already has a joint venture with Tenaris, the largest seamless pipes maker in the world, apart from having a marketing collaboration for Indian operations with Noble Drilling of the US, the second-largest drilling company in the world.

This acquisition will have a three-fold benefit:
First, the cost of manufacturing in East Europe is almost equivalent to what it is in Asia.

Secondly, there will be savings on account of logistics, since the pipes can be shipped from Europe instead of Asia.

The third, and the most important, benefit is the acceptance of the products. European pipes find better acceptance in the Middle East.

The acquisition is a part of the company’s overall plan to double the existing capacity.

Located in the Romanian capital of Bucharest, the plant has a capacity of 2 lakh tonnes per annum. Dubbed as a “pipe academy,” it is the largest plant in Romania.

Consumption of seamless tubes, which form a part of the oil country tubular goods (OCTG) group, is a direct beneficiary of the global capital expenditure in oil & gas exploration and drilling.

The International Energy Association has estimated the global spend in the energy sector to be $20 trillion in the next 25 years.

The demand for pipes is expected to be significant in the next few years against the backdrop of large global energy capex and the domestic water transportation capex.

Maharashtra Seamless, with its strong balance sheet and surplus cash, has the potential to add further capacity through both organic and inorganic routes.

The stock has been an underperformer in the last quarter due to margin pressure, which is expected to ease out when new orders are booked at higher realisations.

Maharashtra Seamless enjoys the status of being the only domestic player to manufacture seamless tubes and electric resistance welded pipes of higher diameter.

At Thursday’s closing price of Rs 581.70 on the BSE, the stock is trading at around 17 times its annualised earnings. Considering the capex expected in the country and overseas, it offers long-term opportunities.

Contributed by Pallavi Pengonda & Sunder Subramanian