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A brief about Steel Industry:
There are two key raw materials to produce steel — coking coal and iron ore. On the coking coal front, India is almost entirely dependent on imports from Australia. So any time we see a disruption in coking coal production in Australia, our costs (COGS) shoot up and our margins tumbles. Simple math!
On the other side, the country is self-sufficient when it comes to iron ore. In fact, we even export this stuff to other countries. Iron ore prices can be extremely volatile too and they can eat into your profit margins just as easily. Tata Steel and SAIL have integrated steel plants where they mine their own iron ore. This way they can exercise a fair degree of control on their input costs and claim a small advantage over other fringe players.
China is the largest manufacturer of steel. They produce over 1 billion tonnes of steel (50% of the world’s supply), India is the second-largest producer and yet we only muster about 111 million tonnes — almost a fraction of China’s output.
Pandemic caused slump in demand and Tata Steel incurred a loss in the two quarters preceding the pandemic. And JSW Steel’s profits dipped by a whopping 90%. But as the time passed by, lockdown restrictions were fading, China was opening up and significantly ramping up investments in infrastructure. So, Indian steelmakers started exporting steel to the China.
Between April and September 2020, China bought 1.9 million tonnes (30%) of India's finished steel exports, which hit their highest in at least six years at 6.5 million tonnes, steel prices are currently on a rally like no other.
Mumbai have hit a record high of ₹47,000 a tonne.
Tata Steel's partly paid shares
What is partly paid shares? What's the need of it if fully paid shares are already listed?
Back in 2018, Tata steel's debt burden (~30,000 Crore) was been affecting their profitability so Tata steel thus decided to reduce its debt via rights issue of of Rs. 12,800 cr. with it’s partially paid up equity shares and deal was simple. If there were 100 shares, there will be 124 shares after the issue.
• For every 25 shares you own, you get FOUR fully paid shares for Rs. 510 per share.
• And also, for every 25 shares, you also get TWO “partly paid” shares for Rs. 610 per share.
In 2018, For partially paid shares you had to pay Rs. 154 per share now and later, Rs. 461 per share whenever they ask for it.
Betting on Tata Steel partly paid shares has turned out to be one of the most rewarding trade this year. From their March lows of Rs 28, the stock has jumped more than six times to Rs. 180.
Also read: 25 Upcoming IPOs and How to Apply for it
Tata Steel fully paid shares, on the other hand, have risen 2.5 times from their March low of Rs 254.
Partly paid shares are like buying a call option of Tata Steel but without an expiration date. They carry a fourth of the value of fully paid shares. The call option date to buy the remaining three-fourths of the shares to convert them into fully paid shares hasn’t been fixed by Tata Steel yet. However, the price has been locked at Rs 615 per share. In other words, those holding partly paid shares will be able to convert them into fully paid shares whenever the company fixes the call option date by paying Rs 461.25 — 75% of the face value. Partly paid shares have 25% face value of ordinary shares. The partly paid shares have the right to buy Tata Steel shares at Rs 615, even as the fully paid shares currently quote at Rs 641.
What's the trade?
Time has come, that partially paid share can be called by the company any time now, to convert it to a fully paid share – each shareholder will have to pay Rs. 461 to convert it to a fully paid share.
Tata Steel Partially paid share price (As on 21 Dec 2020) : 180 Rs.
Conversion rate: 180+461 = 641 Rs.
Current Price: 625 Rs.
Those who bought Tata Steel PP shares at lower price will get benefited if the share price continue to surge. Ex- If you bought Tata Steel PP shares at 100 rs. then you will have the right to buy Tata Steel fully paid shares at 100+461 = 561 Rs even if Tata Steel fully paid shares crosses 700 or 800.
Partly paid shares act as high beta versions of their fully paid shares — they give outsized returns on the way up but also fall sharply on the way down.
Experts say if an investor has a firm believe that steel stocks will continue to gain over the next couple of years can consider investing in partly paid shares (If conversion price is lessor than the price of fully paid shared.)
Research Analyst (SEBI Regd.)
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