Wednesday, May 02, 2018

Uttam  Galva Steel Ltd: Buy
CMP: Rs.13.85
Photo: The Economic Times
There were earlier media reports that Lakshmi Mittal had decided to sell his 29.5% stake in Uttam Galva Steels Ltd at a loss; as the amendments to the Insolvency and Bankruptcy Code (IBC) had barred errant promoters from re-acquiring their own assets and also any related party. 

When the Insolvency and Bankruptcy Code was amended in November, 2017 questions were raised about ArcelorMittal's eligibility as a bidder since it was listed as one of the promoter entities of Uttam Galva; though the group has always maintained that it had no members on the board and were passive investors. 

The Economic Times, stated on 6 Februry, '18 that though an inter-sell transfer of shares among promoters, Sainath Trading Company Limited, a group entity of the promoters of Uttam Galva, the Miglani family, will be buying 4,13,27,931 shares, representing the entire block of shares owned by ArcelorMittal Netherlands BV at an average of Rs.24/share. The Miglani family thereafter will own the entire 60.87% stake, with public shareholders owning the remaining 39.13%, a .. 

Now the catch point is that: the book value of Uttam Galva Steel Ltd is -Rs.47.95, while the buy back is happening at Rs.1 per share, according to Business Standard. Does it not look a little strange and points towards an invisible hand??!! Also, from where the money will come when Miglani family is bankrupt? Who is the real investor?

Photo: The Business Standard
Now, in another development India Infoline had come out with a report that ArcelorMittal is likely to pay Rs.3,000 crore to Uttam Galva Steels Ltd to allow the company to settle its debts. Under Article 29 A of the IBC, promoters of companies that have been declared as non-performing assets are ineligible for participation without clearing their dues. This payment by ArcelorMittal would allow it to re-bid for Essar Steel, without its resolution plan getting upheld under Article 29 A of the IBC.

The total debt of Uttam Galva stood at Rs.6,192 crore at the end of FY17. The management of Uttam Galva recently made an offer to SBI to reduce its debt by ~50% by taking a haircut on outstanding debt. If both these developments take place then the stock should see an extremely positive reaction as the company would be removed from the uncertainty of an NCLT ruling as well as have its interest cost reduced drastically.

Also, I feel that Mittal Group could be bidding for a stake in the company in a fresh way, especially when the share price is trading at almost half the buy back price and now that hassle of promoter tag has been removed. 

The share sale is taking place at a time when bidding for other stressed steel assets is under way, has alarmed lenders and other bidders. This modus operandi could be a way of circumventing guidelines, as all promoters can sell their shares in defaulting units and will, thus, become eligible to bid.

Moreover, after a long hiatus, the steel sector is on the verge of a turnaround due to a sharp fall in the coking coal prices. The essential parameters responsible for the increase in steel mills' profitability are: 
a) A cut in Steel Production in China, leading to a decline in Chinese Exports and
b) A Pick up in ex-China steel demand...

I therefore suggest that risk taking investors can buy the shares of Uttam Galva  Steels Ltd at around the CMP for a short term target of Rs.19. The market cap  of the company is only Rs.197.03 and the  cost of setting up a 1 (one) MTPA capacity steel plant in India is not less than Rs.5000-6000 crore or Rs.50-60 billion. The share is trading above its 30D SMA.  

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